The risk of an individual security that will be compensated by the market depends upon the
A)standard deviation of that security.
B)covariance of that security with the market.
C)expected rate of return on that security.
D)security's historical variance.
E)industry most associated with that security.

Question

Quizplus · Accepted Answer

The covariance of a security with the market reflects how much the security's returns move in response to the overall market's returns. Higher covariance implies that the security is more closely tied to the market and therefore is compensated for the risk by the market. Standard deviation, historical variance, and expected return provide information about the risk and return of a security but are not directly related to market compensation for risk. The industry associated with a security may provide some indication of the overall risk level of the security but does not directly determine market compensation.

The Risk of an Individual Security That Will Be Compensated