The shares of a company have a beta factor of 1.15. Therefore, which of the following must be true?

The beta factor (β) is a core component of the Capital Asset Pricing Model (CAPM) and measures a security's systematic risk relative to the overall market. Systematic risk, also known as market risk, is non-diversifiable and affects the entire market. The market itself is defined as having a beta of 1.0. A beta of 1.15 signifies that the shares are 15% more volatile than the market. Therefore, the shares possess a higher level of systematic risk than the market average. Beta does not provide information about unsystematic (specific) risk, which can be eliminated through diversification, nor does it allow for a definitive conclusion about total risk (systematic + unsystematic).

A. Beta is a measure of systematic risk, not unsystematic risk. No conclusion about the level of unsystematic risk can be drawn from this value.

C. Total risk is the sum of systematic and unsystematic risk. Since beta only measures the systematic component, we cannot determine the total risk.

D. Beta provides no information regarding the level of unsystematic risk, so it is impossible to conclude that it is lower than the market average.

1. Brealey, R. A., Myers, S. C., & Allen, F. (2020). Principles of Corporate Finance (13th ed.). McGraw-Hill Education. In Chapter 8, Section 8.3, "Measuring Market Risk," it is explicitly stated: "The beta of a stock... measures its contribution to the risk of a well-diversified portfolio. This contribution is its systematic risk." A beta greater than 1.0 indicates higher-than-average market risk.

2. CIMA (2019). CIMA P3 Risk Management Study Text. Kaplan Publishing. Chapter 5, Section 3.2, "The Capital Asset Pricing Model (CAPM)," explains that beta measures the systematic risk of an investment. A beta above 1 indicates that the investment is more sensitive to market movements and thus has higher systematic risk than the market portfolio.

3. Sharpe, W. F. (1964). Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk. The Journal of Finance, 19(3), 425–442. This foundational paper introduces the CAPM. On pages 438-440, the model establishes that the relevant risk of an individual asset is its covariance with the market portfolio, which is precisely what beta measures (systematic risk). https://doi.org/10.1111/j.1540-6261.1964.tb02865.x