You own a stock that will produce varying rates of return based upon the state of the economy.Which one of the following will measure the risk associated with owning that stock?
A) weighted average return given the multiple states of the economy
B) rate of return for a given economic state
C) variance of the returns given the multiple states of the economy
D) correlation between the returns give the various states of the economy
E) correlation of the weighted average return as compared to the market

Question

Quizplus · Accepted Answer

The variance of the returns given the multiple states of the economy is the most appropriate measure of risk associated with owning a stock with varying rates of return based on the state of the economy. Variance measures the spread of possible returns around the expected return, and a higher variance implies a greater spread of possible returns and thus a higher level of risk. Option A and B both measure returns but do not account for risk. Option D measures the degree to which the stock's returns move in sync with the overall economy, but does not measure risk. Option E measures how closely the stock's returns are related to the market's returns, but this does not fully capture the stock's unique risk characteristics.

You Own a Stock That Will Produce Varying Rates of Return