Beta (systematic risk)
In a market model, beta equals covariance of asset and market returns divided by market-return variance. It measures systematic sensitivity, not total volatility or a guaranteed response on every occasion. The relevant security and benchmark must be identified: equity beta reflects the shareholder claim and financing risk, while asset beta is used to describe underlying business exposure after adjusting for financing assumptions. Historical estimates can change and may be unreliable for a different project or future environment. A small portfolio can retain unsystematic risk even when its beta is known.
Worked example
If covariance with the market is 0.018 and market-return variance 0.012, beta is 1.5. That sensitivity does not mean every 1% market movement produces exactly a 1.5% security-price movement.
Common mistake
Treating a generic security beta as automatically an ungeared asset beta or confusing beta with total standard deviation.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | FM | Supporting | September 2026–June 2027 |