Assume a security has no unsystematic risk.Given this,the excess return on that security will be the highest if the factor,F,________ and the beta for that factor is ________.
A)increases in value; high
B)increases in value; low
C)remains constant; zero
D)decreases in value; high
E)decreases in value; low

Question

Quizplus · Accepted Answer

Since the security has no unsystematic risk, its return will solely depend on systematic risk or the exposure to market factors. Therefore, the excess return on that security will be the highest if the factor (F) increases in value and the beta for that factor is high, indicating a high exposure to that factor. This will result in a higher expected return compared to other securities with low beta values for the same factor.

Assume a Security Has No Unsystematic Risk