In a single factor market model the beta of a share ________.
A)measures the share's contribution to the standard deviation of the market portfolio
B)measures the share's unsystematic risk
C)changes with the variance of the residuals
D)measures the share's contribution to the standard deviation of the share

Question

Quizplus · Accepted Answer

In a single factor market model, the beta of a share measures the share's contribution to the standard deviation of the market portfolio. Beta measures the systematic risk of the share, which is the risk that cannot be diversified away by holding a diversified portfolio. The higher the beta of a share, the higher its systematic risk, and the higher its contribution to the volatility of the market portfolio. Therefore, A is the correct choice. B is incorrect because beta measures systematic risk, not unsystematic risk. C is incorrect because beta remains the same regardless of the variance of the residuals, which is the unexplained variation in the share's returns. D is incorrect because beta measures the share's sensitivity to the market portfolio, not its contribution to its own volatility.

In a Single Factor Market Model the Beta of a Share