In the context of finance, the term ‘beta’ refers to

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the process of simultaneous buying and selling of an asset from different platforms

an investment strategy of a portfolio manager to balance risk versus reward

a type of systemic risk that arises where perfect hedging is not possible

a numeric value that measures the fluctuations of a stock to changes in the overall stock market.

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This question was previously asked in

UPSC IAS – 2023

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In finance, ‘beta’ is a statistical measure that quantifies the sensitivity of an asset’s (like a stock) returns to the fluctuations of a relevant market index (like the overall stock market). It indicates the asset’s systematic risk relative to the market.

– Beta (β) is a measure of systematic risk, which is the risk inherent to the entire market or market segment.
– A beta of 1 implies the stock’s price moves in line with the market.
– A beta greater than 1 suggests the stock is more volatile than the market.
– A beta less than 1 suggests the stock is less volatile than the market.
– A beta of 0 implies no correlation with the market.

Beta is a key component in the Capital Asset Pricing Model (CAPM), which is used to calculate the expected return of an asset. It helps investors understand how much additional risk they are taking by investing in a specific stock compared to investing in the overall market. Beta does not measure unsystematic (or specific) risk, which can be diversified away.

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