Provide an example of how you could use Beta to measure risk as a financial manager.

Expert Solution

Beta can be defined as a measure of a particular stock's volatility with respect to the market in which it operates. It measures the degree of risk exposure of a particular kind of stock with the similar kind of stocks of the company of the market. There exists two kinds of risk-

Namely

Systematic risk- It refers to the probability of loss linked with the whole market. This occurs because of a factor which impacts the whole market such as changes in government policy for the specific industry.

Unsystematic risks-It refers to the risk associated with a particular kind of industry. The factors can be like the labor strike by the workers of a particular industry.

The beta is a measure of the systematic risk of the portfolio.

An example can be when there is a sudden rise in the inflation of the country. The companies of all the industries will be affected because of it. Since it is a type of systematic risk a beta will be a great tool to measure the degree of risk associated with this.

jeff jeffy answered 2 years ago

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