Question

Both Beta in the CAPM and the standard deviation measure the risk of any asset. Which of these measures best captures the risk of an asset when we think about the return we expect from that asset? Explain.

plz explain more detail, thx!!!

Answer 1

Risk is an inherent part of an equity investment and it has two sources of its origin.

i) Specific company related factors such as loss of customers,imposition of any new regulation on that industry in which company Operates etc.

ii) Overall economy related factors such as change in tax rate,Central bank policy etc.

Hence total risk = Company specific risk + Systamatic risk

Beta is a measurement of sensitivity of investment in realtion to its systematic risk which means it reflects only economy related factors which can't be controlled and it will affects the whole macroeconomic system.

Standard deviation represents the total risk of an asset both company specific and economy related.It comprises all possible risk that an asset will face.Standard deviation is a good measure of risk measurement for a particular asset as it encompasses all risk that the asset will face both systematic and unique risk and provides the total risk face by that asset.