Certified Management Accountant 2025 – 400 Free Practice Questions to Pass the Exam

In the Capital Asset Pricing Model (CAPM), 'Beta' is a crucial measure that reflects the sensitivity of a security's returns compared to the overall market returns. Specifically, it quantifies how much the price of a security is expected to change in response to changes in market prices. A Beta greater than 1 indicates that the security is more volatile than the market, meaning it tends to experience larger price swings—both up and down—while a Beta less than 1 signifies that the security is less volatile, suggesting it is more stable compared to the market. A Beta of 1 implies that the security’s price movements are expected to closely mirror those of the market.

Understanding the significance of Beta is essential for investors, as it helps assess the risk associated with a particular investment. In the context of CAPM, it is utilized to calculate the expected return of an asset, taking into account the risk-free rate and the expected market return. This relationship is fundamental for making informed investment decisions and evaluating the relative risk of various securities.