Canadian Securities Course (CSC) Level 2 Practice Exam

Which factor does beta measure in an investment context?

1. Average distance of every score from the mean

2. The financial skills of an investor

3. The relationship between two variables

4. The variability in an investment's returns compared to the market

The correct answer is: The variability in an investment's returns compared to the market

Beta measures the variability in an investment's returns compared to the market. Specifically, it quantifies the sensitivity of an asset's returns to changes in the overall market returns. A beta value greater than 1 indicates the investment is more volatile than the market, meaning it tends to experience larger price fluctuations. Conversely, a beta less than 1 suggests the investment is less volatile than the market. This characteristic is essential for investors to assess risk, particularly in portfolio management, as it helps to understand how a security might react to market movements. The other options do not accurately relate to what beta measures. Average distance from the mean pertains to standard deviation, which addresses the dispersion of returns rather than their correlation with the market. The financial skills of an investor do not connect to beta, as it is a measure of market risk and not individual capabilities. Finally, while the relationship between two variables is a broad statistical concept, beta specifically captures the relationship between a security's returns and market returns, not merely any two variables.