The part of a stock's return that is systematic is a function of which of the following variables?
I. Volatility in excess returns of the stock market
II. The sensitivity of the stock's returns to changes in the stock market
III. The variance in the stock's returns that is unrelated to the overall stock market
A) I only
B) I and II only
C) II and III only
D) I, II, and III

Question

Quizplus · Accepted Answer

The systematic component of a stock's return is affected by the volatility in excess returns of the stock market and the sensitivity of a stock's returns to changes in the stock market. The variance in the stock's returns that is unrelated to the overall stock market is considered idiosyncratic risk and is not systematic. Therefore, choice B (I and II only) is the correct answer.

The Part of a Stock's Return That Is Systematic Is