A considerable scattering in the plot of points representing the historic returns of a stock versus the returns on the market indicates the:
A)High Beta of the stock
B)Unique risk of the stock
C)Changes in market risk premium over time
D)Current underpricing of the stock

Question

Quizplus · Accepted Answer

A considerable scattering in the plot of points representing the historic returns of a stock versus the returns on the market indicates the unique risk of the stock. Unique risk is the risk associated with specific stocks, which cannot be diversified away by investing in a portfolio of stocks. It is also known as unsystematic risk or company-specific risk. Therefore, option B is the correct answer. Option A is incorrect as high beta implies a higher sensitivity of the stock to market movements, and does not relate to the scattering plot of points. Option C is incorrect as changes in the market risk premium over time would affect all stocks and not just one particular stock. Option D is also incorrect as the current underpricing of a stock cannot be determined from a scatter plot of points representing historic returns.

A Considerable Scattering in the Plot of Points Representing the Historic