Question

We use Beta as a measurement of investment risk because ______.

A. Beta measures the diversifiable risk that investors care about the most

B. Standard deviation is a less accurate measure of riskiness than beta

C. Beta measures the non-diversifiable risk that investors cannot avoid

D. Beta measures the entire riskiness of the investment

Answer 1

• Ans C Beta measures the non-diversifiable Risk that the investor cannot avoid.

• Beta measures the volatility non Diversifiable risk that is known as Systematic risk, That cannot be avoided by company, Investor  and any other person. Non Diversifiable risk affect the whole industry. Example - Inflation, Labour Strike, Political Changes, Interest Rates Etc.
• Beta is Use to show the change in the volatility of Specific stock Price with respect to change in volatility of Market index. In CAPM Model we use Beta to calculate the Expected Return.

• Beta Measure the Non Diversifiable risk, Hence the Option A is Incorrect.
• There is no mean to compare Standard Deviation and Beta, So Option B is Automatically Incorrect.

• Entire Riskiness = Diversifiable Risk + Non Diversifiable Risk
• Beta Measure only Non Diversifiable Risk and Don't Measure Diversifiable Risk. Hence Option D is Incorrect.