In the CAPM framework, what does Beta represent?

In the CAPM framework, what does Beta represent?

• A. The asset's sensitivity to market movements.
• B. The expected market return.
• C. The risk-free rate.
• D. The equity risk premium.

Answer: (A)

Beta represents how much an asset’s returns move with the overall market. It’s the sensitivity of the asset to market movements, essentially the slope of the relationship between the asset’s returns and the market’s returns (often estimated as Cov(Ri, Rm) divided by Var(Rm)). This concept captures systematic risk—the portion of risk that cannot be diversified away. In CAPM, the expected excess return of an asset equals the risk-free rate plus Beta times the market risk premium (E[Rm] − Rf), so Beta scales the reward for taking on market risk. For example, a Beta of 1.3 suggests the asset tends to move about 30% more than the market—up 10% in the market would correspond to roughly a 13% rise in the asset on average, and a market drop would mirror that magnitude downward. Beta can be greater than 1, less than 1, or even negative, reflecting different sensitivities to market moves. It’s not the expected market return, the risk-free rate, or the equity risk premium itself.

Beta represents how much an asset’s returns move with the overall market. It’s the sensitivity of the asset to market movements, essentially the slope of the relationship between the asset’s returns and the market’s returns (often estimated as Cov(Ri, Rm) divided by Var(Rm)). This concept captures systematic risk—the portion of risk that cannot be diversified away. In CAPM, the expected excess return of an asset equals the risk-free rate plus Beta times the market risk premium (E[Rm] − Rf), so Beta scales the reward for taking on market risk. For example, a Beta of 1.3 suggests the asset tends to move about 30% more than the market—up 10% in the market would correspond to roughly a 13% rise in the asset on average, and a market drop would mirror that magnitude downward. Beta can be greater than 1, less than 1, or even negative, reflecting different sensitivities to market moves. It’s not the expected market return, the risk-free rate, or the equity risk premium itself.