An equity security with systematic risk equal to the average amount of systematic risk of all equity securities in the market:
A) has a market beta equal to one.
B) should expect to earn the same rate of return as the average stock in the market portfolio.
C) gives no insight into the risk premium of stock.
D) Both a and b are correct.

Question

Quizplus · Accepted Answer

A stock with systematic risk equal to the market average has a beta of 1, which means it is neither more nor less risky than the overall market. Therefore, it is rational to expect an average or market rate of return, which is consistent with B.

Choice C is incorrect because knowing a stock's systematic risk, as measured by beta, can provide insight into its expected risk premium, as higher beta securities tend to have higher risk premiums.

An Equity Security with Systematic Risk Equal to the Average