In a single-factor market model the beta of a stock ________.
A) measures the stock's contribution to the standard deviation of the market portfolio
B) measures the stock's unsystematic risk
C) changes with the variance of the residuals
D) measures the stock's contribution to the standard deviation of the stock

Question

Quizplus · Accepted Answer

In a single-factor market model, the beta of a stock measures the stock's contribution to the standard deviation of the market portfolio. Beta is used to determine the systematic risk of a stock, which is the risk that cannot be diversified away. A beta of 1 indicates that the stock's price will move in line with the market, while a beta greater than 1 indicates that the stock is more volatile than the market, and a beta less than 1 indicates that the stock is less volatile than the market.

In a Single-Factor Market Model the Beta of a Stock