Practice Quiz

FRM Financial Risk Manager Practice Test

Category - The Capital Asset Pricing Model

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In finance, the beta of a stock or portfolio is a number describing the relation of its returns with that of the financial market as a whole. When an asset has a beta value of 0, which of the following is true?
  1. The asset’s price is not at all correlated with the market or the asset is independent of market.
  2. The asset generally follows the market.
  3. The asset inversely follows the market, but it generally decreases in value if the market goes up and vice versa.
  4. None of the above is true.
Explanation
When an asset has a beta value of 0, its price is not at all correlated with the market. Rather, the asset is independent of market. The beta coefficient is a key parameter in the CAPM. It is a measure of the volatility (or systematic risk) of a security or a portfolio in comparison to the market as a whole. This is the part of the risk that cannot be diversified away. Beta can be estimated for individual companies using regression analysis against a stock market index.

Key Takeaway: Any investment that does not correlate with an index such as the Dow Jones Industrial Average (DJIA) or overall market results is a zero-beta asset.
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