Question

For the higher Beta or systemic risk an investor is willing to accept the expected return is higher.

Answer 1

Systematic risk is also known as market risk or undiversifible risk. It is also referred to as volitality, ie, daily fluctutations in the stock price. It is inherent to the entrire market or market segment. Volatilty is absolutely essemtial for returns as market movement is the reason through which perople make money on stocks.

Higher the volatility of the stock, the more will be the change in its price in either direction.

Beta is a measure of the systematic risk or volatility of a stock or a portfolio as compared to the entire market. Beta calculates the exposure of a stock or portfolio with relation to the market.

Beta = 0 means the stock or portfolio is not related to market.

Beta less than 0 indicates the stock moves in direction opposite to the market.

Beta between 0 and 1 indicates stock moves in same direction as the market but with less volatility.

Beta = 1 means the stock has the same volatility, move in the same direction and is sensitive to systematic risk.

Beta >1 means stock will move in same direction as the market but will have higher volatility.

As discussed above, higher volatility means the stock, more the change in price movement in either direcion. Hence higher beta means high risk but it also means high returns. An investor who want high returns would be willing to invest in stocks or create a portfolio which has a high beta or systematic risk.