Which of the following statements is CORRECT?Answer A stock\'s beta is less rele

Question

Which of the following statements is CORRECT?Answer A stock's beta is less relevant as a measure of risk to an investor with a well-diversified portfolio than to an investor who holds only that one stock. If an investor buys enough stocks, he or she can, through diversification, eliminate all of the diversifiable risk inherent in owning stocks. Therefore, if a portfolio contained all publicly traded stocks, it would be essentially riskless. The required return on a firm's common
stock is, in theory, determined solely by its market risk. If the market risk is known, and if that risk is expected to remain constant, then no other information is required to specify the firm's required return. Portfolio diversification reduces the variability of returns (as measured by the standard deviation) of each individual stock held in a portfolio. A security's beta measures its non-diversifiable, or market, risk relative to that of an average stock. A stock's beta is less relevant as a measure of risk to an investor with a well-diversified portfolio than to an investor who holds only that one stock. If an investor buys enough stocks, he or she can, through diversification, eliminate all of the diversifiable risk inherent in owning stocks. Therefore, if a portfolio contained all publicly traded stocks, it would be essentially riskless. The required return on a firm's common
stock is, in theory, determined solely by its market risk. If the market risk is known, and if that risk is expected to remain constant, then no other information is required to specify the firm's required return. Portfolio diversification reduces the variability of returns (as measured by the standard deviation) of each individual stock held in a portfolio. A security's beta measures its non-diversifiable, or market, risk relative to that of an average stock. A stock's beta is less relevant as a measure of risk to an investor with a well-diversified portfolio than to an investor who holds only that one stock. If an investor buys enough stocks, he or she can, through diversification, eliminate all of the diversifiable risk inherent in owning stocks. Therefore, if a portfolio contained all publicly traded stocks, it would be essentially riskless. The required return on a firm's common
stock is, in theory, determined solely by its market risk. If the market risk is known, and if that risk is expected to remain constant, then no other information is required to specify the firm's required return. Portfolio diversification reduces the variability of returns (as measured by the standard deviation) of each individual stock held in a portfolio. A security's beta measures its non-diversifiable, or market, risk relative to that of an average stock.

Explanation / Answer

A security's beta measures its non-diversifiable, or market, risk relative to that of an average stock.

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