Chartered Market Technician (CMT) Practice Exam 2025 – Your All-in-One Guide to Exam Success!

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What is the function of beta in the CAPM model?

To measure the efficiency of a portfolio

To represent the market's total return

To gauge the volatility of an asset in relation to the market

In the Capital Asset Pricing Model (CAPM), beta serves a crucial function by quantifying the volatility of an asset relative to the overall market. It effectively measures the sensitivity of the asset's returns to the fluctuations of the market as a whole. A beta greater than one indicates that the asset is expected to be more volatile than the market, whereas a beta of less than one suggests that the asset is less volatile. This relationship is fundamental in constructing efficient portfolios, as it helps investors understand the risk associated with individual assets compared to market movements. By incorporating beta into the CAPM, investors can make informed decisions about the expected return on an asset based on its risk in relation to the expected market return. This aspect of beta aligns it closely with the concept of systematic risk, which cannot be diversified away.

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To indicate the risk-free rate of return

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