Civil Services Prep

Prelims 2023 · Economy · Question 93

In the context of finance, the term 'beta' refers to

  1. the process of simultaneous buying and selling of an asset from different platforms
  2. an investment strategy of a portfolio manager to balance risk versus reward
  3. a type of systematic risk that arises where perfect hedging is not possible
  4. a numeric value that measures the fluctuations of a stock to changes in the overall stock market

Answer

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

  • (a) This describes arbitrage—buying and selling the same asset across markets to profit from price differences. Incorrect.
  • (b) This refers broadly to portfolio management/risk-return balancing, not beta itself. Incorrect.
  • (c) This describes basis risk, which arises when hedging is imperfect. Incorrect.
  • (d) Beta is a numerical measure of a stock’s sensitivity/volatility relative to the overall market; market beta is typically taken as 1. Correct.
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