Correct Answer:
B. Market risk of a stock
In finance, beta (Ξ²) is a measure of a stock's volatility in relation to the overall market. It quantifies the systematic risk, also known as non-diversifiable risk, of an investment. Systematic risk refers to the risk inherent to the entire market or market segment, which cannot be mitigated through diversification.
- A beta of 1 indicates that the stock's price tends to move with the market.
- A beta greater than 1 suggests the stock is more volatile than the market (e.g., a beta of 1.5 means the stock is expected to move 1.5% for every 1% market move).
- A beta less than 1 implies the stock is less volatile than the market.
- Beta is a crucial component of the Capital Asset Pricing Model (CAPM), used to calculate the expected return on an asset.
- A: Liquidity risk is the risk of not being able to sell an asset quickly without a significant loss in value.
- C: Inflation risk is the risk that inflation will erode the purchasing power of an investment's returns.
- D: Credit risk is the risk of a borrower defaulting on debt obligations.
- None of these are directly measured by beta. Therefore, B: Market risk of a stock is the correct answer.