In the context of finance, the term 'beta' refers to
- (a) the process of simultaneous buying and selling of an asset from different platforms
- (b) an investment strategy of a portfolio manager to balance risk versus reward
- (c) a type of systemic risk that arises where perfect hedging is not possible
- (d) a numeric value that measures the fluctuations of a stock to changes in the overall stock market ✓ UPSC's answer
Why the answer is (d)
• In finance, 'beta' is a number that measures how much a stock's returns move relative to the overall market: a beta of 1 moves with the market, above 1 is more volatile, below 1 less volatile — option (d).
• It is the measure of systematic (market) risk used in the Capital Asset Pricing Model to estimate the expected return on a stock.
• High-beta stocks (e.g. small-caps) rise and fall more than the index; low-beta stocks (e.g. utilities) are defensive.
• Hence option (d).
Why the other options are wrong
- (a) the process of simultaneous buying and selling of an asset from different platforms
- Simultaneous buying and selling across platforms is arbitrage.
- (b) an investment strategy of a portfolio manager to balance risk versus reward
- Balancing risk and reward is portfolio strategy, not beta.
- (c) a type of systemic risk that arises where perfect hedging is not possible
- Risk from imperfect hedging is basis risk, not beta.
Asked in the GS Paper I of the UPSC Civil Services Preliminary Examination 2023, held on 28 May 2023. Question and answer key: Union Public Service Commission. Explanation: UPSC Answer Check.