Also, leverage is assumed to be positively correlated with the firm's equity risk. For example, the Great Recession was a form of systematic risk; the economic downturn affected the market as a whole. What is the expected return for a stock that has a beta of 1.5, if the risk-free rate is 6% and the market rate of return is 11%? It can be captured by the sensitivity of a security’s return with respect to market return. Multiple Choice beta, can beta, cannot standard deviation cannot standard deviation may or may not standard deviationcan Get more help from Chegg Get 1:1 help now from expert Finance tutors B. beta. Assume that the beta of an investor's portfolio is 2.0 in relation to a broad market index, such as the S&P 500. Positive correlation is a relationship between two variables in which both variables move in tandem. This problem has been solved! The S&P 500, Dow Jones Industrial Average, and Nasdaq 100 are frequently used beta measures. its beta. Beta coefficient is a measure of systematic risk. The S&P 500 is used as the measure because of the high number of large-cap stocks included in the index and the broad number of sectors included. The difference between systematic risk and unsystematic risk are: Systematic Risk. Systematic risk, or total market risk, is the volatility that affects the entire stock market across many industries, stocks, and asset classes. Systematic risk, as measured by beta, is a composite measurement of the volatility of a securities return associated with the sensitivity of the security with significant factors that affect the return on all securities. The market is described as having a beta of 1. The Dow Jones Industrial Average (DJIA) has also previously been the main measure of the market, but it has fallen out of favor since it only includes 30 companies and is very limited in its breadth. If a stock has a beta above 1, it's more volatile than the overall market. This model calculates the required return for an asset versus its risk. This measure can help investors determine how much capital to allocate to a hedge fund or whether they would be better off keeping their exposure in the equity market or even cash. This indicator is also a meas-urement to show the imminence of individ-ual profit rate of a certain stock to the change of market index profit rate. A high beta index is a basket of stocks that exhibit greater volatility than a broader market index like the S&P 500. Beta is used for measurement of systematic risk or in other words, it is an indicator of systematic risks. It essentially measures the relative risk exposure of holding a particular stock or … non-diversifiable . Martin Corporation can now issue debt at … In recent years, the outperformance of FAANG stocks has made the Nasdaq 100 a popular beta measure among investors and traders. The beta coefficient is calculated by dividing the covariance of the stock return versus the market return by the variance of the market. A higher beta coefficient means higher systematic risk and vice versa. The S&P 500 High Beta Index is the most well-known of these indexes. Unlike with unsystematic risk, diversification cannot help to smooth systematic risk, because it affects a wide range of assets and securities. Another name of systematic risk is volatility risk. If the beta is below 1, the stock either has lower volatility than the market, or it's a volatile asset whose price movements are not highly correlated with the overall market. A benchmark for correlation values is a point of reference that an investment fund uses to measure important correlation values such as beta or R-squared. Scanning for stocks that have a beta above 2 quickly finds suitable trading candidates that move twice as much as the S&P 500 Index. 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