Of the options listed below, which is the best measure of systematic risk?

Question

BlackTom AI · Accepted Answer

Question restatement: Of the options listed below, which is the best measure of systematic risk?
Options: The weighted average standard deviation; The arithmetic average; Beta; The geometric average; The standard deviation.
Option 1: The weighted average standard deviation. This would not capture market-wide risk specifically; standard deviation measures total volatility, not the portion attributable to market movements, and a weighted approach here does not isolate systematic risk.
Option 2: The arithmetic average. An arithmetic mean summarizes central tendency of returns or values, not risk exposure to systematic factors, so it fails to quantify systematic risk.
Option 3: Beta. Beta measures a security's sensitivity to movements in the overall market, i.e., its covariance with the market divided by the market variance. This directly captures systematic (non-diversifiable) risk, making it the best measure among the choices for systematic risk.
Option 4: The geometric average. The geometric mean describes compound growth rates over time and is not a measure of risk, nor of systematic risk specifically.
Option 5: The standard deviation. While standard deviation assesses total volatility, it does not isolate the portion due to market-wide movements; it conflates systematic and unsystematic risk, so it’s not the best measure of systematic risk.
In summary, among the given options, Beta uniquely quantifies how much a security’s returns move with the market, aligning directly with the concept of systematic risk, whereas the others describe general risk or average outcomes without tying them to market risk exposure.

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