Beta
Beta
A measure of a security's volatility relative to the overall market (systematic risk). Beta of 1.0 means the security moves in line with the market; >1.0 indicates higher volatility; <1.0 indicates lower volatility. Beta does not measure unsystematic (company-specific) risk.
A stock with beta of 1.5 is expected to rise 15% when the market rises 10%, but also fall 15% when the market falls 10%. Utility stocks often have betas of 0.6-0.8 (defensive), while technology stocks may have betas of 1.3-1.8 (aggressive).
Beta measures only systematic (market) risk, not total risk. Standard deviation measures total risk including both systematic and unsystematic components. A low-beta stock can still have high total risk if it has significant company-specific volatility.
How This Is Tested
- Calculating expected returns based on beta and market movement
- Interpreting what a beta greater than, less than, or equal to 1.0 means
- Comparing securities with different betas to determine relative market sensitivity
- Understanding that beta measures systematic (market) risk, not total risk or unsystematic risk
- Identifying appropriate investments for clients based on desired beta levels (defensive vs. aggressive)
- Recognizing that negative beta indicates inverse correlation with the market
Regulatory Limits
| Description | Limit | Notes |
|---|---|---|
| Market beta (benchmark) | 1.0 | By definition, the market itself has a beta of 1.0; individual securities are measured relative to this |
| Risk-free asset beta | 0.0 | Treasury bills have zero beta since they have no market risk |
Example Exam Questions
Test your understanding with these practice questions. Select an answer to see the explanation.
Robert, age 68, is a recently retired engineer with $800,000 in his IRA. He wants to maintain equity exposure for growth but is concerned about experiencing sharp portfolio declines during market downturns. His investment policy statement specifies he wants lower volatility than the overall market. Which portfolio allocation would best meet Robert's objectives?
B is correct. A portfolio with beta of 0.7 is less volatile than the market, meaning it will experience smaller percentage swings (both up and down) than the overall market. This defensive positioning aligns with Robert's goal to maintain equity exposure while reducing volatility during market downturns. For example, if the market falls 10%, a 0.7 beta portfolio would be expected to fall only 7%.
A is incorrect because a beta of 1.4 is MORE volatile than the market (40% more), which contradicts Robert's goal of lower volatility and would expose him to sharper declines during downturns. C (beta 1.0) would match market volatility, not reduce it as Robert requested. D (negative beta) is inappropriate because while it would theoretically profit in market declines, it would also lose value during market advances, eliminating the growth potential Robert wants to maintain.
The Series 65 exam tests your ability to match portfolio characteristics to client risk tolerance and investment objectives. Understanding beta is essential for constructing portfolios with appropriate volatility levels. Retirees and conservative investors typically benefit from low-beta (defensive) portfolios, while younger investors with longer time horizons may accept high-beta (aggressive) portfolios.
What does a beta of 1.0 indicate about a security?
B is correct. A beta of 1.0 means the security has the same level of systematic (market) risk as the overall market. When the market moves up or down by a certain percentage, a security with beta of 1.0 is expected to move up or down by approximately the same percentage.
A is incorrect because a risk-free asset (like Treasury bills) has a beta of 0.0, not 1.0. C is incorrect because negative beta (below 0.0) indicates inverse correlation with the market, not beta of 1.0. D is incorrect because zero correlation with the market would be indicated by beta near 0.0, and a security with beta of 1.0 has perfect positive correlation with market movements.
The Series 65 exam frequently tests knowledge of beta benchmarks. Understanding that 1.0 represents market-level systematic risk is fundamental to portfolio construction and risk assessment. This knowledge is essential for interpreting fund performance statistics and explaining volatility characteristics to clients.
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Access Free BetaDuring the past month, the S&P 500 index declined by 12%. A stock with a beta of 1.35 would be expected to have declined by approximately how much during the same period?
D is correct. Calculate: Market decline × Beta = -12% × 1.35 = -16.2% (a decline of 16.2%). A beta of 1.35 means the stock is 35% more volatile than the market, so it amplifies market movements by that factor.
A (8.9%) incorrectly divides the market decline by beta (-12% ÷ 1.35) instead of multiplying. B (12.0%) incorrectly assumes beta of 1.0 (moving with the market) rather than using the given beta of 1.35. C (13.5%) appears to confuse the beta value (1.35) with the percentage decline, but the correct calculation requires multiplying the market movement by the beta coefficient.
Beta calculation questions are common on the Series 65 exam. You must understand how to apply beta to predict expected price movements based on market movements. This calculation is fundamental to portfolio risk assessment and helps advisors set realistic expectations for client portfolios with specific beta characteristics.
All of the following statements about beta are accurate EXCEPT
C is correct (the EXCEPT answer). Beta does NOT capture unsystematic (company-specific) risk; it measures only systematic (market) risk. Unsystematic risk can be diversified away in a portfolio, while systematic risk (measured by beta) cannot be eliminated through diversification. Standard deviation, not beta, measures total risk including both systematic and unsystematic components.
A is accurate: beta specifically measures sensitivity to systematic (market) risk, which is the portion of risk that cannot be diversified away. B is accurate: beta above 1.0 means the security is more volatile than the market benchmark (amplifies market movements). D is accurate: negative beta (rare but possible, like with some gold stocks or inverse ETFs) indicates the security tends to move in the opposite direction of the market.
The Series 65 exam tests your ability to distinguish between systematic risk (measured by beta) and total risk (measured by standard deviation). This distinction is critical for portfolio construction because unsystematic risk can be reduced through diversification, while systematic risk requires asset allocation decisions and cannot be diversified away within an asset class.
An investment adviser is analyzing four stocks for a client's portfolio:
Stock W: Beta = 0.5
Stock X: Beta = 1.0
Stock Y: Beta = 1.6
Stock Z: Beta = -0.2
Which of the following statements are accurate?
1. Stock W would be considered a defensive stock with lower volatility than the market
2. Stock X should move approximately in line with the market
3. Stock Y is appropriate for aggressive investors seeking higher returns
4. Stock Z would be expected to rise when the market declines
D is correct. All four statements are accurate.
Statement 1 is TRUE: Stock W (beta 0.5) is a defensive stock that is half as volatile as the market. When the market moves 10%, Stock W would move approximately 5%. Defensive stocks include utilities, consumer staples, and healthcare companies.
Statement 2 is TRUE: Stock X (beta 1.0) has market-level systematic risk and should move approximately in line with the overall market, making it appropriate for investors seeking market-matching returns with market-level volatility.
Statement 3 is TRUE: Stock Y (beta 1.6) is an aggressive stock that is 60% more volatile than the market. It amplifies both gains and losses, making it suitable for aggressive investors with higher risk tolerance who seek potentially higher returns (understanding they will also experience larger losses during market downturns).
Statement 4 is TRUE: Stock Z (negative beta of -0.2) has inverse correlation with the market and would be expected to rise when the market falls. When the market declines 10%, Stock Z would be expected to rise approximately 2%. Negative beta stocks are rare but include some gold mining stocks and inverse ETFs.
The Series 65 exam tests comprehensive understanding of how different beta values affect portfolio behavior and suitability. You must recognize that beta below 1.0 indicates defensive characteristics, beta of 1.0 matches the market, beta above 1.0 indicates aggressive characteristics, and negative beta indicates inverse market correlation. This knowledge is essential for constructing portfolios aligned with client risk profiles and market outlook.
💡 Memory Aid
Beta = "Bounce" relative to market. Beta > 1 = BIG bounce (aggressive). Beta < 1 = small bounce (defensive). Beta = 1 = same bounce as market. Beta = 0 = no bounce (risk-free). Negative beta = opposite bounce (inverse).
Related Concepts
This term is part of this cluster:
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Where This Appears on the Exam
This term is tested in the following Series 65 exam topics:
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