What does a beta of 1 indicate about a security's volatility compared to the market?

• A. The security is less volatile than the market
• B. The security moves in tandem with the market
• C. The security is more volatile than the market
• D. The market is completely indifferent to the security

Answer: (B)

A beta of 1 indicates that the security's price movement is directly aligned with the overall market. This means that if the market goes up or down, the security is expected to move in the same direction by the same percentage. Essentially, a beta of 1 suggests that the security has a volatility level that matches the volatility of the market as a whole.

When the market experiences a certain percentage change, the security with a beta of 1 will also experience a similar percentage change. For instance, if the market increases by 10%, a security with a beta of 1 would also be expected to increase by approximately 10%. This characteristic makes it a suitable representation of the market volatility, serving as a benchmark for investors looking to understand how the security reacts in relation to broader market movements.