Chartered Market Technician (CMT) Practice Exam 2026 – Your All-in-One Guide to Exam Success!

In the Capital Asset Pricing Model (CAPM), beta is the key variable as it measures the sensitivity of an asset's returns relative to the overall market's returns. This parameter reflects the systematic risk associated with the asset, indicating how much the asset's price is expected to move in relation to market movements. A beta of 1 suggests that the asset's price movements are in line with the market, while a beta greater than 1 indicates higher volatility than the market, and a beta less than 1 indicates lower volatility.

Understanding beta is crucial for investors as it helps them assess the risk of an investment in the context of market fluctuations. By incorporating beta into the CAPM equation, investors can estimate the expected return of an asset based on its exposure to market risk, thereby informing their investment decisions. This relationship underscores the importance of beta in the CAPM framework, making it a cornerstone for evaluating expected investment performance in relation to risk.