Question

In the context of CAPM/SML, which of these is not true about Beta:

		it is fairly stable over time
		it shows how much on average the stock price changed when the market return moved +/- 1%
		it measures unsystematic risk
		it is estimated by running a regression of stock returns vs market returns

Answer 1

Beta which is used in CAPM (Capital Assets Pricing Model) shows the volatility and systematic risk of any security or portfolio. It measures volitality of an individual stock and not of the whole market. Beta shows the slope of line through regression of data points of a single stock against that of the market.

It shows the relationship between the systematic risk and expected return of stocks. It describes the behaviour of security's return due to fluctuations in the market.

Market is taken as base for the calculation, therefore any change in the market affects the stock price.

If beta=1: volatile, if beta>1: more volatile, if beta<1: less volatile.

Keeping all these things in the mind we can conclude that two things in the given question is not true about beta:

It is fairly stable over time; and

It measures unsystematic risk.