Question

If a security has a high beta, it indicates that the _______________ is high relative to that of other securities.

	a.	systematic or market risk of the security
	b.	non-systematic or idiosyncratic risk of the security
	c.	total risk of the security
	d.	covariance of the security with any randomly selected security
	e.	correlation coefficient between that security and any other security

Answer 1

Beta is a measure of a security's market risk/systematic risk relative to (a) benchmark security/index/market return. It does not measure a security's idiosyncratic risk or non-systematic risk. Further, it is not a measure of the security's total risk(only systematic risk and systematic plus non-systematic together make total risk).

Additionally, the beta is the security's covariance with respect to the benchmark, divided by the benchmark's variance. The correlation coefficient of the security and any other security is equal to their covariance with each other (not benchmark) divided by the product of their respective standard deviations. Therefore, statement (d) and (e) are incorrect. So are the statements (b) and (c) as explained earlier. Hence, the correct option is (a).