Beta measures a security’s sensitivity to movements in the broader market and therefore represents systematic risk . A market portfolio is conventionally assigned a beta of 1.0. A company beta of 1.8 indicates that the security has materially greater market sensitivity than the market benchmark. Subject to the limitations of the estimate, a one-percent market movement would be associated with an approximately 1.8% movement in the security in the same direction. Option B is therefore the only conclusion supported by the stated beta.
Beta does not measure unsystematic or company-specific risk. That risk arises from factors such as management decisions, competitive developments, operational failures or issuer-specific financial problems and may be reduced through diversification. Consequently, neither option A nor option C can be established from beta alone. Option D directly contradicts the meaning of a beta significantly above 1.0.
Beta should not be interpreted as a guarantee of a specific future price movement. It is an estimated relationship based on a selected benchmark and measurement period. Nevertheless, among the choices provided, a beta of 1.8 unambiguously denotes relatively high systematic risk.
The Retail Securities syllabus specifically includes beta as a risk measure and requires candidates to apply the capital asset pricing model when assessing security and portfolio risk.
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