Course: Investment Planning
Lesson 1: Key Principles of Investing
I don’t understand why this statement is true: “Beta is a measure of systematic, non-diversifiable risk.”
I thought Beta was a measure ofrelative volatility?
This is from a Board-Related Question in “Measures of Investment Risk” in “Principles of Investing”.
Good question and a key concept to know for the CFP Board Exam.
- Beta measures the volatility of my security or portfolio compared to the “market.”
- Beta answers the question, “How volatile is my portfolio vs. the market?”
The “market” in this case is an appropriate benchmark.
- For example, if my portfolio is comprised solely of large cap securities, then the “market” for the beta calculation would likely be the S&P 500 index.
Beta measures ONLY Systematic risk.
- Systematic risk includes only inflation risk, reinvestment rate risk, interest rate, market risk, and exchange rate risk.
- According to the theories tested on the CFP Board Exam, you cannot diversify out of systematic risk.
- Systematic risk cannot be diversified away.
Beta measures only systematic risk because Beta ignores all other investment risks (nonsystematic risks).
Let me know how fully this addresses your question.