Beta measures non-diversifiable systematic risk, which sets relative asset prices

Evidence

With the market itself taken to be the unique optimal portfolio of risky assets (a conclusion on which Sharpe, Treynor, Linter, and Mossin concurred”), the Capital Asset Pricing Model’s parameter, beta, had a simple interpretation: it was the sensitivity of returns on the asset to overall market fluctuations. That sensitivity was the risk that could not be diversified away, and the extent of that “market risk” or “systematic risk” determined the relative prices of risky capital assets such as stocks. — Donald MacKenzie, An Engine, Not a Camera, 253

Categorization

• DEFINE: Clean definition of beta as the undiversifiable ‘systematic risk’ that determines relative prices — core definitional content for the CAPM framework.
• XREF: connects to: In equilibrium, securities with higher betas yield higher expected returns. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 237; Value-at-risk quantifies portfolio exposure through estimated loss probabilities. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 995; An asset’s expected return rises in a straight line with its market beta — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 254 (+1 more)

Broader Connections

• An asset’s expected return rises in a straight line with its market beta #expands (0.85) — Donald MacKenzie, An Engine, Not a Camera, 254
• CAPM states expected return is linear in beta against an optimal portfolio. #expands (0.80) — Donald MacKenzie, An Engine, Not a Camera, 240
• Value-at-risk quantifies portfolio exposure through estimated loss probabilities. #corroborates (0.75) — Donald MacKenzie, An Engine, Not a Camera, 995