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CAPM betas are measures of systematic risks, which include things like the exchange rate, inflation, interest rates, etc.

What I'm confused about is described below:

E.g. suppose I'm looking at one company's beta, which has decreased from 0.8 to 0.6 over 1 year, and during that period, the home country's exchange rate decreased which saw an increase in exports and sales revenue for the firm.

How has this exchange rate (amongst other factors) led to the decrease in the beta? Is it because the firm is performing well relative to the market portfolio so is seen as less risky?

Simply: how do factors like exchange rates, inflation and interest rates actually affect the beta? What's the link between them? When I see a change in a variable like exchange rates, how do I link it to the beta?

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    $\begingroup$ Beta measures the sensitivity of the firm cash flows to broad factors like growth, interest rates, FX rates, etc, but is not directly affected by those factors going up and down. If firm is the same, Beta is the same. If something changes at the firm for example the firm sells a division that exports abroad to concentrate on the domestic market, or changes its capital structure to no longer borrow in foreign currency then the Beta could indeed change (fall/rise) because the firm is now affected less/more by the above mentioned factors. $\endgroup$
    – Alex C
    Nov 29, 2019 at 14:19
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    $\begingroup$ Of course Beta is measured with statistical error, so the measured Beta could also change slightly for random unknowable reasons (also known as measurement error). $\endgroup$
    – Alex C
    Nov 29, 2019 at 14:45

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In CAPM, Beta is not a systemic risk or a characteristic of any security:

  1. if the risk-free rate changes, the market portfolio changes as the tangent point moves, and beta changes accordingly
  2. When a security's payoff is changed or a new security is added to the market, the market portfolio must be changed, and the betas should be change
  3. Changes in investor preferences and endowments will change the equilibrium total market value, thereby affecting the return on the market portfolio and the beta of individual stocks

The beta you mention is a time series beta, the estimator you get from the regression of stock's return on some market index. This beta, is not the beta in CAPM. For more, see CAPM is neither a cross sectional model, nor a time series model

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