ACCA Financial Management (F9) Certification Practice Exam

What is characterized by a beta of 1?

1. Higher risk compared to the market

2. Insensitive to market changes

3. Moves in line with the stock market

4. Has less than average risk

The correct answer is: Moves in line with the stock market

A beta of 1 indicates that the security's price movement is perfectly correlated with the overall market. When the beta is equal to 1, it means that the security will typically increase or decrease in price in tandem with the market moves. For example, if the market rises by 10%, a security with a beta of 1 is also expected to rise by approximately the same percentage. This relationship is crucial in finance, particularly in the Capital Asset Pricing Model (CAPM), where beta is used to measure the risk of a security in relation to the market. A beta of 1 suggests that the investment has an average risk profile—neither significantly more nor less volatile than the market itself. In contrast, a beta greater than 1 would imply higher risk (the first option) as the security would tend to move more dramatically than the market, while a beta less than 1 indicates lower risk (the fourth option) as price changes would be less pronounced compared to the market. Additionally, being insensitive to market changes (the second option) suggests a beta of 0, which correlates to no risk at all relative to market volatility. Therefore, the characteristic of having a beta of 1 accurately aligns with the notion of moving