If you were to compare the returns of an individual share to a market index, select the answer below that is most true.
A) The returns of the individual share will show more variability than those of the market index.
B) The returns of the individual share will show less variability than those of the market index.
C) The returns of the individual share will show the same level of variability than those of the market index, if they have the same beta.
D) None of the above.

Question

Quizplus · Accepted Answer

Individual shares are subject to specific risks, such as company-specific news, management changes, or industry developments, that can cause their returns to fluctuate more than the broad market. In contrast, market indexes represent a more diversified portfolio of stocks, which can mitigate some of the idiosyncratic risks affecting individual shares. Therefore, a comparison of individual share returns to a market index would likely highlight the greater variability of the former.

If You Were to Compare the Returns of an Individual