What does a high beta of a security imply about its risk level compared to the market?

• A. It has a lower risk
• B. It carries the same risk as the market
• C. It is significantly riskier than the market
• D. It is risk-free

Answer: (C)

A high beta indicates that a security is more volatile than the overall market. Beta is a measure of a security's price movement in relation to the market as a whole; a beta greater than 1 suggests that the security tends to move more aggressively, both up and down, than the market. Therefore, a high beta means that the security carries a higher level of risk because its price is expected to experience larger fluctuations in comparison to the market average. This increased volatility can lead to higher potential returns, but it also increases the likelihood of significant losses. As a result, a high beta signals that investors are taking on more risk when they invest in that security relative to the market's overall risk.