Beta β is the measure of systematic risk and it can be applied to market timing. Consider the following situation: Mike is an investor and he expects that the market will go down. How should he react to the expectation?
Explanation
When the market is expected to go down, Mike would want less exposure to the stock market, so he should buy stocks with lower systematic risks, or lower beta. Lower systematic risk means lower risk associated with aggregate market returns.
Key Takeaway: Systematic risk is the risk associated with aggregate market returns. Systematic risk cannot be reduced through diversification. This of course is a theoretical question to illustrate a point, as most stocks have systematic risk. If Mike thinks the market is going down for sure, he should probably get out of equities altogether.
