An increase in nondiversifiable risk
A) would cause an increase in the beta and would increase the required return.
B) would cause an increase in the beta and would lower the required return.
C) would have no effect on the beta and would, therefore, cause no change in the required return.
D) would cause a decrease in the beta and would, therefore, lower the required rate of return.

Question

Quizplus · Accepted Answer

Nondiversifiable risk (systematic risk) cannot be eliminated through diversification, therefore it affects the entire market or a specific segment of the market. When nondiversifiable risk increases, the beta of the security also increases since it measures the sensitivity of a security's returns to market movements. As a result, the required return will increase accordingly.

An Increase in Nondiversifiable Risk