Systematic risk is considered important because ________________________.
A) It is needed in order to measure the total risk of an asset.
B) The risk premium depends only on this type of risk.
C) The market does not provide a reward for this type of risk.
D) The risk premium depends on both systematic and unsystematic risk.
E) Investors are willing to pay more for stocks with high systematic risk components.

Question

Quizplus · Accepted Answer

CSystematic risk, also known as market risk, affects the entire market or a large segment of the market and cannot be eliminated through diversification. The risk premium, which is the return above the risk-free rate that investors require to compensate for taking on additional risk, depends only on systematic risk because unsystematic risk can be diversified away. Therefore, the market does not provide a reward for bearing unsystematic risk, making systematic risk particularly important for determining the risk premium on an investment.

Systematic Risk Is Considered Important Because ________________________