UPSC Prelims 2023 Q73: Indian Economy – Financial Markets & Capital Markets
- (a) the process of simultaneous buying and selling of an asset from different platforms
- (b) an investment strategy of a portfolio manager to balance risk versus reward
- (c) a type of systemic risk that arises where perfect hedging is not possible
- (d) a numeric value that measures the fluctuations of a stock to changes in the overall stock market
Answer: (d) a numeric value that measures the fluctuations of a stock to changes in the overall stock market
Explanation
'Beta' in Finance
Beta (β) is a measure of a stock's volatility (systematic risk) relative to the overall stock market.
| Beta Value | Interpretation |
|---|---|
| β = 1 | Stock moves exactly with the market |
| β > 1 | Stock is MORE volatile than market (amplifies market moves) |
| β < 1 | Stock is LESS volatile than market (defensive stock) |
| β < 0 | Stock moves OPPOSITE to market (rare; gold sometimes) |
Formula context: Used in the Capital Asset Pricing Model (CAPM) to calculate expected return:
Expected Return = Risk-free rate + β × (Market return − Risk-free rate)
Other options eliminated:
- Simultaneous buying/selling = Arbitrage
- Risk vs reward portfolio strategy = Alpha or general portfolio management
- Systemic risk where perfect hedging is impossible = Basis risk
Answer: (d) a numeric value that measures the fluctuations of a stock to changes in the overall stock market.
Why each option is right or wrong
- (a) Incorrect. Simultaneous buying and selling from different platforms to profit from price differences = arbitrage, not beta.
- (b) Incorrect. An investment strategy balancing risk vs reward = general portfolio management or risk-return tradeoff — not specifically 'beta'.
- (c) Incorrect. Systemic risk where perfect hedging is impossible = basis risk or irreducible systematic risk — not beta.
- (d) CORRECT. Beta measures the fluctuations of a stock relative to overall stock market changes — a β of 1.5 means the stock moves 1.5% for every 1% market move.
Key point
Beta (β) = stock's volatility relative to market. β>1 = more volatile, β<1 = defensive. Used in CAPM. 'Fluctuations of stock to changes in overall market' = exact definition of beta.
Remember
In finance, beta (β) is a numeric value that measures the fluctuations of a stock relative to changes in the overall stock market. A beta of 1.5 means the stock moves 50% more than the market in either direction.
Common mistakes
- Confusing beta with alpha — alpha measures excess return above market; beta measures co-movement with market.
- Thinking basis risk = beta — basis risk is about imperfect hedging relationships; beta is about market sensitivity.
- Selecting arbitrage as beta — arbitrage is a trading strategy exploiting price differences; beta is a risk measure.
Exam tip
Beta = sensitivity of stock to market moves. CAPM uses beta. High beta = tech/growth stocks. Low beta = FMCG/utilities (defensive). Negative beta = gold (moves against market). UPSC Finance: alpha (excess return), beta (market sensitivity), arbitrage (price exploitation).
Sources
- NCERT Economics Class 12 — Financial Markets
- SEBI — Investor Education: Understanding Risk Measures