What does Beta measure in portfolio analysis?

What does Beta measure in portfolio analysis?

• A. Absolute return
• B. Volatility relative to a benchmark
• C. Interest rate risk
• D. Credit quality

Answer: (B)

Beta measures how much a security’s or portfolio’s returns move in response to overall market movements, capturing its systematic risk relative to a benchmark. A beta of 1 means it tends to move with the market; a beta greater than 1 indicates greater volatility than the market, while a beta less than 1 indicates less volatility. This concept underpins models like CAPM, where expected return is linked to the market risk premium multiplied by beta. It’s about relative volatility to the chosen benchmark, not the absolute level of return. It also differs from interest rate risk (sensitivity to rate changes) and credit quality (credit risk). Beta is estimated from historical return data against a market index and can change with time or the chosen benchmark.

Beta measures how much a security’s or portfolio’s returns move in response to overall market movements, capturing its systematic risk relative to a benchmark. A beta of 1 means it tends to move with the market; a beta greater than 1 indicates greater volatility than the market, while a beta less than 1 indicates less volatility. This concept underpins models like CAPM, where expected return is linked to the market risk premium multiplied by beta. It’s about relative volatility to the chosen benchmark, not the absolute level of return. It also differs from interest rate risk (sensitivity to rate changes) and credit quality (credit risk). Beta is estimated from historical return data against a market index and can change with time or the chosen benchmark.