Question 85 from UPSC CSE 2023 - Economics

Question

In the context of finance, the term 'beta' refers to

IASCODEX · Accepted Answer

Correct Option: D. a numeric value that measures the fluctuations of a stock to changes in the overall stock market

Strategy: Focus on the keyword 'beta' as used in finance, specifically in portfolio and stock analysis. Only option D accurately defines beta as a numeric measure relating a stock's price movements to market-wide movements--directly reflecting standard textbook usage. Other options describe arbitrage (A), portfolio strategies (B), or types of risk (C), none of which define beta itself.

Key Info: In finance, **beta** (β) is a statistical measure that evaluates the volatility of a security or portfolio relative to the entire market (e.g., NIFTY or S&P 500).

*   **CAPM Integration**: Beta is a central concept in the Capital Asset Pricing Model (CAPM), which is fundamental for risk-reward analysis in portfolio theory.
*   **Volatility Interpretation**:
    *   A beta of **1** implies the asset moves in line with the market.
    *   A beta **higher than 1** signals greater volatility (an aggressive stock).
    *   A beta **less than 1** implies less volatility (a defensive stock).
    *   A **negative beta** means the asset moves inversely to the market.
*   **Systematic Risk**: Beta specifically quantifies the systematic risk (market risk) component that cannot be diversified away.
*   **Unrelated Concepts**:
    *   **Alpha**: Measures excess return relative to a benchmark, not volatility.
    *   **Arbitrage (Option A)**: Involves simultaneous buying and selling for profit, unrelated to beta.
    *   **Portfolio Management (Option B)**: Refers to strategy, not beta as a metric.
    *   **Systematic Risk (Option C)**: While relevant, beta quantifies exposure to it, not hedging challenges.

IASCODEX · Answer

Option A: the process of simultaneous buying and selling of an asset from different platforms

IASCODEX · Answer

Option B: an investment strategy of a portfolio manager to balance risk versus reward

IASCODEX · Answer

Option C: a type of systemic risk that arises where perfect hedging is not possible