Question

A security with a level of systematic risk that is the same as that of the market has a beta that is

Answer 1

Answer:

equal to 1

Explanation:

Beta refers to a coefficient that denotes the degree of responsiveness of security returns with respect to that of market return. Beta is calculated as,

= $\frac{Change\ in\ security\ return}{Change\ in\ market\ return}$

which further means, beta is equal to deviation (risk) in security return w.r.t deviation (risk) in market return.

Beta is a measure of systematic risk which is, the market related risk to which whole of stock market is exposed to. Examples of systematic risk would be, change in the inflation rate, political instability, change in state of economy such as boom or recession, etc.

Systematic risk is not a company specific risk and thus, such a risk cannot be eliminated by a company via diversification of investments.

Thus, for a security whose systematic risk is equal to that of the market , it's beta will be equal to one which means the magnitude by which, the market falls or rises, the stock shall also fall or rise by the same margin. It also means the same direction of movement i.e if market rises, stock price would rise by same proportion and vice versa.