Which of the following statements is correct?
A)A security's beta measures its diversifiable (firm-specific) risk relative to that of other securities.
B)If the returns of two firms are negatively correlated, one of them must have a negative beta.
C)A stock's beta is less relevant as a measure of risk to an investor with a well-diversified portfolio than to an investor who holds only one stock.
D)Combining stocks that are perfectly negatively correlated and that have the same beta coefficient into a portfolio is riskier than holding an individual stock, because the portfolio will not benefit from diversification.
E)A stock's beta can be calculated by comparing its returns to the market's returns over some time period because the beta coefficient measures a stock's volatility relative to market.

Question

Quizplus · Accepted Answer

A stock's beta represents its volatility or risk relative to the overall market. It is calculated by comparing the stock's returns to the market's returns over a set time period. Beta does not measure diversifiable risk, so A is incorrect. B is also incorrect because negative correlation does not necessarily mean a negative beta. C is partially correct in that a diversified portfolio reduces the relevance of beta as a measure of risk, but it is still useful in determining a stock's systematic risk. D is incorrect because perfectly negatively correlated stocks would provide the maximum diversification benefit, reducing overall risk in a portfolio.

Which of the Following Statements Is Correct