Evaluating Risk Using Beta

Medium Portfolio Risk And Return Risk Measures

Mark is an investment analyst who is evaluating the risk profile of two mutual funds, Fund A and Fund B. Fund A has a beta of 1.1, while Fund B has a beta of 0.8. Both funds have an expected return of 12%. Mark wants to determine which fund presents a lower risk in relation to expected market movements. He recalls that beta is a measure of a portfolio's sensitivity to market movements.

Given this information, Mark is interested in understanding how the betas of the two funds can help him assess their risk profiles. Which statement best describes the relationship between beta and risk for these two funds?

Fund A has lower risk than Fund B because it has a higher expected return.

Fund B has lower risk than Fund A because it has a lower beta.

Both funds have equal risk because they have the same expected return.

Hint

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