An increase in nondiversifiable risk
A) would cause an increase in the beta and would lower the required return.
B) would have no effect on the beta and would, therefore, cause no change in the required return.
C) would cause an increase in the beta and would increase 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, also known as systematic risk, affects the entire market and cannot be eliminated through diversification. An increase in nondiversifiable risk would increase the market or systematic risk, causing an increase in the stock's beta coefficient. This would result in an increased required rate of return to compensate investors for the additional risk associated with the stock. Therefore, the correct choice is C - an increase in nondiversifiable risk would cause an increase in the beta and would increase the required return.

An Increase in Nondiversifiable Risk