Beta and Systematic Risk

Beta measures the volatility, or systematic risk, of a security or portfolio relative to the market as a whole. A beta of 1.0 indicates that the investment’s price moves with the market.

• Systematic Risk: Risk that affects the entire market (interest rates, inflation, war). Cannot be diversified away.
• Unsystematic Risk: Company-specific risk. Can be eliminated via diversification.
• Beta < 1: Less volatile than the market (e.g., Utilities).
• Beta > 1: More volatile than the market (e.g., Tech startups).

CAPM uses Beta to determine the expected return of an asset.