Which of the following statements best describes the beta term used in the CAPM?
A)It is the ratio of the covariance between excess market returns to the variance between excess share returns and excess market returns.
B)It is the ratio of the covariance between excess share returns and excess market returns to the variance of excess market returns.
C)It is the ratio of the variance between excess share returns and excess market returns to the variance of excess market returns.
D)It is the ratio of the variance between excess share returns and excess market returns to the covariance of excess market returns.

Question

Quizplus · Accepted Answer

The beta term represents the sensitivity of an asset's returns to overall market movements. It is calculated as the ratio of the covariance between excess share returns and excess market returns to the variance of excess market returns. Option B correctly describes this calculation. Option A and D have the elements in reverse order. Option C does not include the covariance component.

Which of the Following Statements Best Describes the Beta Term