Suppose stock X has a beta of 2.5 and stock Y has a beta of 0.5. From this we can conclude that X has
A) 5 times the nondiversiﬁable risk of the market portfolio.
B) 5 times the nondiversiﬁable risk of Y.
C) 2.5 times the nondiversiﬁable risk of Y.
D) 2.5 times the diversiﬁable risk of the market portfolio.

Question

Quizplus · Accepted Answer

Beta measures a stock's volatility in relation to the market. A beta of 2.5 means stock X is 2.5 times more volatile than the market, and a beta of 0.5 means stock Y is half as volatile as the market. Therefore, stock X has 5 times the nondiversifiable risk of stock Y (2.5 / 0.5 = 5).

Suppose Stock X Has a Beta of 2