Beta measures the marginal contribution of a stock to the risk of a well-diversified portfolio.

Question

Quizplus · Accepted Answer

Beta is a measure of systematic risk or the sensitivity of a stock's returns to changes in the overall market. It measures the extent to which a stock's returns move in relation to the market's returns. A beta of 1 indicates that the stock's returns move in line with the market, while a beta greater than 1 indicates that the stock is more volatile than the market, and a beta less than 1 indicates that the stock is less volatile than the market. In the context of a well-diversified portfolio, beta measures the marginal contribution of a stock to the risk of the portfolio as a whole. In other words, beta helps investors evaluate how much risk (volatility) they are adding to their portfolio by adding a particular stock.

Beta Measures the Marginal Contribution of a Stock to the Risk