A considerable scattering in the plot of points representing the historic returns of a stock versus the returns on the market indicates the:
A)high Beta of the stock.
B)unique risk of the stock.
C)changes in market risk premium over time.
D)current underpricing of the stock.

Question

Quizplus · Accepted Answer

A considerable scattering in the plot of points represents a high degree of unique risk of the stock, which is not related to the movements of the overall market. It implies that the company's performance is dependent on its own underlying characteristics, such as management decisions, product quality, competitive position, technological changes, etc. Beta would be a measure of systematic risk, which reflects the stock's sensitivity to market movements, but it does not explain the significant variations in returns beyond what can be attributed to overall market fluctuations. Changes in the market risk premium over time may have some impact on the returns, but they would affect all stocks in the market to a similar extent, so they would not account for the stock's idiosyncratic risks. And current underpricing of the stock would not be revealed by the scatter plot of historic returns versus market returns, but would require other valuation methods and market analysis.

A Considerable Scattering in the Plot of Points Representing the Historic