Question

John is an analyst at Star Investments, Inc. and is currently working on valuing HomeStore, Inc. which is a home goods retail store. The Beta for Homestore is 1.5 and standard deviation for monthly returns of Homestore is 10%. Expected return on the market is 8% and Treasury bill rate is 3%.Beta captures which one of the following types of risk?

a.Systematic risk
b.Company Specific risk
c.Unsystematic risk
d.None of the answers

Answer 1

Beta captures the systematic risk of a stock or portfolio, indicating how sensitive it is to market movements. HomeStore, Inc.'s beta of 1.5 suggests it is more volatile than the overall market.

Step-by-step explanation:

The beta is a measure that captures the systematic risk of a stock or portfolio in comparison to the overall market. Systematic risk, also known as market risk, is the risk inherent to the entire market or market segment. This type of risk cannot be diversified away and is often influenced by factors such as economic changes, political events, or natural disasters which affect the performance of all securities in the market. John, working as an analyst at Star Investments, Inc., finds that HomeStore, Inc. has a beta of 1.5, which means it is more volatile than the market and is expected to be 50% more receptive to market movements. In contrast, unsystematic risk, also known as specific or idiosyncratic risk, is unique to a particular company or industry and can be minimized through diversification.