Question map
In the context of finance, the term 'beta' refers to
Explanation
The correct answer is Option 4.
In finance, Beta (β) is a measure of the systematic risk or volatility of an individual stock or portfolio in comparison to the entire market. It indicates how much the price of a specific asset is expected to respond to swings in the market index (like the Nifty 50 or S&P 500).
- A Beta of 1 implies the stock moves in sync with the market.
- A Beta greater than 1 signifies higher volatility (aggressive).
- A Beta less than 1 indicates lower volatility (defensive).
Regarding other options: Option 1 describes Arbitrage. Option 2 refers generally to Portfolio Management or the Sharpe Ratio context. Option 3 describes Basis Risk. Therefore, only Option 4 accurately defines Beta as a numeric sensitivity tool for market-related fluctuations.
PROVENANCE & STUDY PATTERN
Guest previewThis question exposes the gap between 'textbook economy' and 'financial literacy'. While standard books explain market structures, they often miss specific trading jargon like 'Beta'. The strategy is simple: maintain a running glossary of terms from the 'Business' page of The Hindu or Indian Express rather than diving into finance textbooks.
This question can be broken into the following sub-statements. Tap a statement sentence to jump into its detailed analysis.
- Statement 1: In finance, does the term "beta" refer to the process of simultaneous buying and selling of an asset on different platforms (arbitrage)?
- Statement 2: In finance, does the term "beta" refer to an investment strategy used by a portfolio manager to balance risk versus reward?
- Statement 3: In finance, does the term "beta" refer to a type of systemic risk that arises where perfect hedging is not possible?
- Statement 4: In finance, does the term "beta" refer to a numeric value that measures a stock's fluctuations relative to changes in the overall stock market?
Defines a financial market as a place that brings buyers and sellers together to trade financial assets, emphasising buying and selling activity.
A student can combine this with the standard definition of arbitrage (simultaneous buying and selling across venues) to see that 'arbitrage' is about trading activity, not necessarily a single technical term like 'beta'.
Explains options as instruments that give rights to buy or sell an underlying asset â illustrating trading mechanisms that arbitrageurs often use.
Using basic knowledge that arbitrage exploits price differences via buy/sell positions (often using options), a student could infer that the term for such trading is 'arbitrage', suggesting 'beta' is unlikely to be that term.
Describes forwards as contracts to buy or sell an asset at a future date, showing another trading/transfer mechanism used in market strategies.
A student can contrast contractual buy/sell mechanisms (forwards) with the concept of simultaneous spot buy/sell arbitrage, helping narrow whether 'beta' could mean arbitrage.
Distinguishes primary (only buying new securities) from secondary markets (both buying and selling of existing securities), highlighting where trading and arbitrage occur.
A student could use this to note that arbitrage involves secondary-market trading across venues, and thus check if 'beta' is used to name such trading or something else.
Gives an example of institutional buying and selling (RBI's open market operations) used to influence markets â an applied instance of market trades rather than a risk metric.
A student might extend this by recognizing that terms describing trading actions (like OMOs or arbitrage) differ from statistical measures, prompting them to look up whether 'beta' is an action or a metric.
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This statement analysis shows book citations, web sources and indirect clues. The first statement (S1) is open for preview.
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This statement analysis shows book citations, web sources and indirect clues. The first statement (S1) is open for preview.
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