Canadian Securities Course (CSC) Level 2 Practice Exam

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Prepare for the Canadian Securities Course (CSC) Level 2 Practice Exam. Study with multiple choice questions and detailed explanations. Ace your exam with comprehensive practice tests!

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What type of risk of a portfolio does Beta link to according to the text?

  1. Systematic risk

  2. Non-systematic / specific risk

  3. Market risk

  4. Interest rate risk

The correct answer is: Market risk

Beta measures the sensitivity of a portfolio's returns to movements in the market as a whole, which characterizes systematic risk. Systematic risk refers to the inherent risk that affects the entire market or a specific segment, and it cannot be diversified away. It is influenced by factors such as economic changes, political events, and natural disasters, which impact all securities to some extent. While market risk is closely related to systematic risk, it specifically pertains to the fluctuations in the value of investments caused by broader market changes. Choosing systematic risk provides a more precise understanding of what Beta represents, as it directly measures how much asset returns are affected by market-wide movements. The other options, like non-systematic risk, which is unique to a specific company or industry, and interest rate risk, which relates to fluctuations in interest rates affecting bond prices, do not correctly align with the definition and purpose of Beta in assessing portfolio risk. Therefore, linking Beta to systematic risk is the most accurate representation of its role in portfolio management.