Chartered Market Technician (CMT) Practice Exam

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What does beta measure in the context of investing?

The stability of a stock

The relationship of an individual stock's return to a market index

Beta measures the relationship of an individual stock's return to a market index, typically in terms of how much the stock's price tends to move in relation to the broader market's movements. It quantifies the sensitivity of a stock's returns to changes in the market's returns. A high beta indicates that the stock tends to be more volatile than the market—when the market rises or falls, the stock's price is likely to experience more significant fluctuations. Conversely, a low beta suggests that the stock is less sensitive to market movements. Understanding beta is crucial for investors who want to assess how the specific stock's returns are correlated with market trends, which aids in portfolio risk management and investment decisions.

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Overall market risk

Company earnings volatility

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