In the context of finance, the term 'beta' refers to
- A.the process of simultaneous buying and selling of an asset from different platforms
- B.an investment strategy of a portfolio manager to balance risk versus reward
- C.a type of systemic risk that arises where perfect hedging is not possible
- D.a numeric value that measures the fluctuations of a stock to changes in the overall stock market
Correct answer
Explanation
The correct answer is D, a numeric value that measures the fluctuations of a stock to changes in the overall stock market. Beta tells how strongly a share's price moves when the whole market moves. The market itself has a beta of 1. A stock with a beta of 1.5 tends to rise or fall about 50% more than the market, while a beta below 1 means the stock is steadier than the market. A negative beta means it tends to move against the market. Investors use beta to judge the market risk of a stock and it is a key input in the capital asset pricing model. Option A is wrong because buying and selling the same asset on different platforms at once to profit from a price gap is called arbitrage. Option B is wrong because balancing risk and reward is asset allocation or portfolio strategy, not beta. Option C is wrong because risk that remains when hedging is imperfect is called basis risk. Exam tip: beta = sensitivity to the market; alpha = return above the market.
Practice Questions
View allAccording to the law of diminishing marginal utility, as the amount of a good consumed increases, the marginal utility of that good tends to
- A.improve
- B.diminish
- C.remain constant
- D.first diminish and then improve
Show answer
Each extra unit of a good gives a consumer less additional satisfaction than the unit before it, so marginal utility falls as consumption rises.
Read the full explanation →Consider the following statements about impact of tax : 1. A tax is shifted forward to consumers if the demand is inelastic relative to supply. 2. A tax is shifted backward to producers if the supply is relatively more inelastic than demand. Which of the statements given above is/are correct?
- A.1 only
- B.2 only
- C.Both 1 and 2
- D.Neither 1 nor 2
Show answer
The burden of a tax falls more heavily on whichever side of the market is less elastic, the side that cannot easily walk away.
Read the full explanation →UBI, as an alternative for subsidies in poverty alleviation, stands for
- A.Union Basic Income
- B.Undefined Basic Income
- C.Unconditional Basic Income
- D.Universal Basic Income
Show answer
UBI is the idea of paying every citizen a fixed sum of money regularly, without conditions, in place of a large number of separate subsidies and welfare schemes.
Read the full explanation →Who among the following is the Chairman of the Fourteenth Finance Commission?
- A.C. Rangarajan
- B.Vijay Kelkar
- C.Y. V. Reddy
- D.Rakesh Mohan
Show answer
The Fourteenth Finance Commission, set up in 2013 for the award period 2015-2020, was chaired by Y. V. Reddy, a former Governor of the Reserve Bank of India.
Read the full explanation →Why was constitutional amendment needed for introducing GST?
- A.States were not willing to agree with the Union for introduction of GST without amendment in the Constitution.
- B.GST was to be implemented on concurrent base and Article 246 was inadequate for such a case.
- C.The Empowered Committee of Finance Ministers had recommended for constitutional amendment.
- D.The GST Council had recommended for constitutional amendment so that its power enhances.
Show answer
GST is levied by the Union and the States together on the same supply, and Article 246, which splits taxing powers between them through separate lists, did not allow such a concurrent tax.
Read the full explanation →