Which statement best describes beta?

• A. Liquidity risk.
• B. Currency risk.
• C. Credit risk.
• D. Sensitivity to market moves.

Answer: (D)

Beta measures sensitivity to market moves. It captures how much a security’s or portfolio’s returns respond to changes in the overall market, reflecting systematic risk rather than risks specific to the asset itself. A beta of 1 means the asset tends to move in line with the market; a beta above 1 indicates higher volatility relative to the market; a beta below 1 indicates lower volatility. This concept is central to models like the Capital Asset Pricing Model, where expected return depends on the risk premium of the market and the asset’s beta: higher beta implies higher expected return to compensate for taking on more market risk. For example, if the market rises by 10% and the asset has a beta of 1.2, the asset would typically rise around 12%; if the market falls by 5%, the asset would typically fall around 6%. Beta is not about liquidity risk, currency risk, or credit risk; those other risks describe different dimensions of risk that beta specifically does not measure.