Question

Which figure represents the Beta of the market?

a.1

b.0

c.depends on the market?

I think its (A. 1) but I don't know why. Could someone correct me if I'm wrong and do the explaination?

Answer 1

You are correct that:

Correct option is a. 1

Market beta is always 1.

Market risk premium i.e. Return on market - Risk free rate

The base is Market risk premium and when calculating Expected return of any stock we need to learn that particular stock is how much risker than market risk i.e. we want to know answer in times and that represented by beta.

Beta of 1 means stock is equally risky as market portfolio, Beta more than 1 means stock is riskier than market portfolio and Beta equal to zero means we are taking about Risk-free rates.

Mathematical explanation:

Beta of stock = Covariance of (market, stock) / Variance of market

Now, if we want beta of market;

Beta of market = Variance of market / Variance of market = 1

In above, we relating market with market then formula be like stated above.