If an investor was looking for an investment with a risk equal to that of the market, which factor would she want in an investment?
Correct Answer: D
Explanation
Beta is a measure of the systematic risk of an investment, which is the risk that is related to the movements of the market as a whole. Beta compares the volatility of an investment to the volatility of the market. A beta of 1 means that the investment has the same level of risk as the market, and it tends to move in the same direction and magnitude as the market. A beta of 0 means that the investment has no correlation with the market, and it is unaffected by market fluctuations. A beta greater than 1 means that the investment is more risky than the market, and it tends to amplify the market movements. A beta less than 1 means that the investment is less risky than the market, and it tends to dampen the market movements. Therefore, if an investor was looking for an investment with a risk equal to that of the market, she would want a beta of 1. References:
* Canadian Investment Funds Course (CIFC) Study Guide, Chapter 4: Mutual Funds, Section 4.5: Risk and Return of Mutual Funds, page 4-231
* Beta Definition - Investopedia2