Which statement about beta interpretation is correct?

• A. Beta measures systematic risk relative to the market; beta > 1 indicates more sensitivity to market moves; beta < 1 indicates less sensitivity; used for regression-based risk assessment.
• B. Beta measures total risk including diversifiable risk.
• C. Beta measures liquidity risk.
• D. Beta is used to predict inflation.

Answer: (A)

Beta captures how a security moves with the market, reflecting the systematic risk that cannot be diversified away. A beta greater than one means the security tends to amplify market swings—if the market rises, the security tends to rise more than the market, and if the market falls, it falls more. A beta less than one means it’s less sensitive to market moves, moving with the market but to a smaller extent. A beta around one indicates similar sensitivity to market movements. Regression is commonly used to estimate this relationship, which is why beta is described as a regression-based measure of risk. This is why the statement that beta measures systematic risk relative to the market, with beta > 1 indicating more sensitivity and beta < 1 indicating less sensitivity, and that it’s used for regression-based risk assessment, is correct. Beta does not measure total (diversifiable) risk, it does not gauge liquidity risk, and it isn’t used to predict inflation.