Which of the following statements concerning risk are correct?
I.Systematic risk is measured by beta.
II.The risk premium increases as unsystematic risk increases.
III.Systematic risk is the only part of total risk that should affect asset prices and returns.
IV.Diversifiable risks are market risks you cannot avoid.
A) I and III only
B) II and IV only
C) I and II only
D) III and IV only
E) I, II, and III only
F) None of the above.

Question

Quizplus · Accepted Answer

Statement I is correct as systematic risk, also known as market risk, is measured by beta. Beta measures how sensitive an asset's returns are to the overall market movement.
Statement III is also correct as systematic risk is the only risk that should affect asset prices and returns since it is beyond an investor's control and affects the entire market.
Statement II is incorrect as the risk premium actually decreases as unsystematic risk increases since investors can diversify and reduce the impact of unsystematic risk on their portfolio. 
Statement IV is incorrect as diversifiable risks are risks that can be avoided by diversification, such as company-specific risks or industry risks. They are also known as unsystematic risks, while market risks are known as systematic risks.

Which of the Following Statements Concerning Risk Are Correct