The sensitivity of a stock's returns to the returns on a market portfolio is referred to as the:
A)stock's market risk premium.
B)Stock's Beta.
C)market portfolio's systematic risk.
D)stock's unique risk.

Question

Quizplus · Accepted Answer

The sensitivity of a stock's returns to the returns on a market portfolio is measured by Beta. Beta is used to measure the systematic risk of a stock, i.e., the risk that cannot be diversified away. Option A is incorrect because market risk premium is the difference between the expected return on the market and the risk-free rate of return. Option C is incorrect because the market portfolio's systematic risk is equal to one. Option D is incorrect because the unique risk is also known as unsystematic risk, which is the risk that can be diversified away.

The Sensitivity of a Stock's Returns to the Returns on a Market