Consider the following two statements: (i) The market beta is the standardized variance of the market portfolio.
(ii) The market beta is an appropriate measure of risk under the assumptions of homogenous
Expectations and riskless borrowing and lending.
A)(i) is correct and (ii) is incorrect.
B)(ii) is correct and (i) is incorrect.
C)(i) and (ii) are both correct.
D)(i) and (ii) are both incorrect.
E)There is no such thing as a market beta.

Question

Quizplus · Accepted Answer

Statement (i) is incorrect as the market beta is not the standardized variance of the market portfolio. The market beta is the covariance between the return on the market portfolio and the return on a particular asset divided by the variance of the return on the market portfolio.

Statement (ii) is correct as the assumptions of homogenous expectations and riskless borrowing and lending are the basis for the Capital Asset Pricing Model (CAPM), which uses the market beta as a measure of systematic risk.

Therefore, choice B is the correct answer.

Consider the Following Two Statements: (I) the Market Beta Is