In a factor model, the return on a stock in a particular period will be related to
A)factor risk.
B)nonfactor risk.
C)standard deviation of returns.
D)factor risk and nonfactor risk.

Question

Quizplus · Accepted Answer

In a factor model, the return on a stock in a particular period will be related to both factor risk and nonfactor risk. Factor risk refers to the risk that is common to a group of stocks that share certain characteristic or factors, such as industry, size, or growth opportunities. Nonfactor risk, on the other hand, refers to the risk that is specific to an individual stock and cannot be diversified away. Therefore, the correct choice is D, as the return on a stock in a particular period will be influenced by both factor risk and nonfactor risk.

In a Factor Model, the Return on a Stock in a Particular