What is the beta of a risk-free asset?

Understand the Problem

The question is asking about the beta coefficient of a risk-free asset, which is a measure of its volatility in relation to the market. Since a risk-free asset is expected to have no risk and provide a guaranteed return, its beta is typically 0. This question seeks to clarify the concept of beta in finance.

More Information

The beta of a risk-free asset is zero because there is no covariance between the returns of a risk-free asset and the market returns, meaning the asset is not influenced by market movements.

Tips

A common mistake is assuming that any asset must have a beta greater than zero because they conflate risk-free assets with low-risk assets. In contrast, risk-free assets, such as government treasury bonds, are defined by their zero-beta characteristics.

Sources

• Beta and CAPM - analystprep.com
• Solved Risk-free assets have a beta of 0 and the market | Chegg.com - chegg.com
• Solved the beta associated with a risk free asset ___ (Chegg) - chegg.com