Question

Which one of these statements related to beta is correct?

A. The beta of a risk-free security is set at 1.

B. The higher the beta, the lower the risk of a security.

C. Beta measures the risk of a single security if held in a large, diversified portfolio.

D. Beta measures the total risk of a single security whether held independently or as part of a portfolio.

E. A stock with a high standard deviation will also have a high beta.

Answer 1

Correct option is C. Beta measures the risk of a single security if held in a large, diversified portfolio.

Beta measures the risk of the particular security and beta get assigned for the stated systematic risk of that particular security only.

Option A, B, D and E are false. Commentary in bold below:

A. The beta of a risk-free security is set at 1. > Beta of risk free security is Zero

B. The higher the beta, the lower the risk of a security. > Higher beta implies higher risk taken

D. Beta measures the total risk of a single security whether held independently or as part of a portfolio > Beta is systematic risk measure where are standard deviation is total risk measure

E. A stock with a high standard deviation will also have a high beta. > There can be possibility that major portion of risk is occupied by unsystematic risk and small portion is occupied by systematic risk.