Which of the following statements is FALSE? A) Beta represents the amount by whi

Question

Which of the following statements is FALSE?

A) Beta represents the amount by which risks that affect the overall market are amplified for a given stock or investment.

B) Beta is the expected percent change in the excess return of the security for a 1% change in the excess return of the market portfolio.

C) Beta measures the diversifiable risk of a security, as opposed to its market risk, and is the appropriate measure of the risk of a security for an investor holding the market portfolio.

D) It is common practice to estimate beta based on the historical correlation and volatilities.

Explanation / Answer

Answer : C)

Beta measures the nondiversifiable risk of a security, risk of an investment that cannot be reduced by diversification. It does not measure the risk of an investment held on a stand-alone basis, but the amount of risk the investment adds to an already-diversified portfolio.

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