Beta and systematic risk

CFA Level I Portfolio Management
#1

Beta measures how the return on the asset changes when market return changes and since changes in market return are generally due to systematic factors, beta is a measure of systematic risk. Does this make sense or am I getting something wrong here?

#2

You got it.

2 Likes
#3

Beta and systematic risk are important concepts in finance, especially when analyzing investments like stocks.

:chart_with_upwards_trend: Beta:

  • Beta measures how much a stock (or portfolio) moves relative to the overall market.
  • A Beta of 1 means the stock moves in line with the market.
  • A Beta greater than 1 means it’s more volatile than the market (moves more up and down).
  • A Beta less than 1 means it’s less volatile than the market.

Example:
If a stock has a Beta of 1.5, and the market rises by 10%, the stock would be expected to rise by about 15%.

:earth_africa: Systematic Risk:

  • Systematic risk is the market-wide risk that affects all investments.
  • It’s caused by things like economic recessions, political instability, inflation, or interest rate changes.
  • You cannot eliminate systematic risk by diversifying — it affects the entire market.

Example:
Even if you own a perfectly diversified portfolio, a global financial crisis would likely still cause your investments to drop.

:link: How They’re Connected:

  • Beta measures an asset’s exposure to systematic risk.
  • Higher Beta = greater sensitivity to market-wide risks.
  • Investors use Beta to decide if a stock fits their risk tolerance and portfolio strategy.

Want me to also explain how Beta is used in models like the Capital Asset Pricing Model (CAPM)? :rocket:

#4

What do you mean by “how much a stock (or portfolio) moves”?

Are you talking about changes in price, or changes in return?

(Hint: returns.)

This is not necessarily true. A stock with a beta of 1 can have returns that are substantially more volatile than the market’s returns. You’re ignoring the correlation that is a component of beta.

This is true (if you’re talking about volatility of returns, not prices), but only through sheer luck.

No, it doesn’t.

Again, you’re ignoring correlation.

A stock can have a beta of 0.1 and have returns that are twice as volatile as the market’s returns.

This isn’t true.

You’re treating beta as if it compares prices. Beta compares returns.