A scatter in the plot of a stock's returns versus the returns on the market reflects the:
A) high beta of the stock.
B) specific risk of the stock.
C) changes in market risk premium over time.
D) current underpricing of the stock.

Question

Quizplus · Accepted Answer

The scatter in the plot of a stock's returns versus the returns on the market reflects the specific risk of the stock, which is the risk that is unique to the individual stock and cannot be diversified away. High beta (A) indicates that the stock is more volatile than the market, but it does not explain the scatter. Changes in market risk premium over time (C) affect all stocks in the market, and are not specific to one stock. Current underpricing of the stock (D) may affect the stock's future returns, but it does not explain the scatter in the plot of past returns versus the market returns.

A Scatter in the Plot of a Stock's Returns Versus