Which of the following statements is CORRECT?
A) The characteristic line is the regression line that results from plotting the returns on a particular stock versus the returns on a stock from a different industry.
B) The slope of the characteristic line is the stock's standard deviation.
C) The distance of the plot points from the characteristic line is a measure of the stock's market risk.
D) The distance of the plot points from the characteristic line is a measure of the stock's diversifiable risk.
E) "Characteristic line" is another name for the Security Market Line.

Question

Quizplus · Accepted Answer

The distance of the plot points from the characteristic line, in the context of the Capital Asset Pricing Model (CAPM), represents the stock's diversifiable risk, which is the risk that can be eliminated through diversification. The characteristic line itself is a regression line that shows the relationship between the returns on a stock and the returns on the market as a whole, not between different industries or the Security Market Line. The slope of this line is the beta of the stock, which measures its market risk, not its standard deviation.

Which of the Following Statements Is CORRECT