Beta is the standard CAPM measure of systematic risk. It gauges the tendency of the return of a security to move in parallel with the return of the stock market as a whole. One way to think of beta is as a gauge of a security’s volatility relative to the market’s volatility.

What does a beta between 0 and 1 mean?

A beta between 0 and 1 signifies that it moves in the same direction as the market, but with less volatility—that is, smaller percentage changes—than the market as a whole. A beta of 1 indicates that the portfolio will move in the same direction, have the same volatility and is sensitive to systematic risk.

What does it mean when the beta of a stock is zero?

Beta = 0: If the Beta is equal to zero then this implies that there is no relation between the movement of the returns of the stock and the market or the benchmark and hence both are too dissimilar to have any common pattern in price movements.

How does the beta of a stock relate to systematic risk?

Here, we take a closer look at how beta relates to systematic risk. Systematic risk cannot be eliminated through diversification since it is a nonspecific risk that affects the entire market. The beta of a stock or portfolio will tell you how sensitive your holdings are to systematic risk, where the broad market itself always has a beta of 1.0.

Is it better to have a beta of 0 or 0?

3 Answers. A Beta of 0 does not imply zero variance, securities still have idiosyncratic risk (i.e. a random component of return not explained by systematic exposure). A risk-free investment is still less risky than a security with a beta exposure of zero although they both have the same expected return.

What should you know about a zero beta portfolio?

Key Takeaways 1 A zero-beta portfolio is constructed to have zero systematic risk—a beta of zero. 2 Beta measures an investment’s sensitivity to a price movement of a specifically referenced market index. 3 Zero-beta portfolios have no market exposure so are unlikely to attract investor interest in bull markets, since such… More …