Which of the following statements is correct regarding total risk?
A) A conglomerate will have more total risk than a firm that has one line of business.
B) All firms have about the same total risk because they are all exposed to the same market risk.
C) Total risk can be quantified by measuring the covariance between the firm and the overall market.
D) None of the statements are correct.

Question

Quizplus · Accepted Answer

Total risk includes both systematic (market) risk and unsystematic (specific) risk. Statement A is incorrect because diversification, such as in a conglomerate, typically reduces total risk. Statement B is incorrect because firms have different levels of total risk due to their unique unsystematic risks. Statement C is incorrect because the covariance with the market measures systematic risk, not total risk.

Which of the Following Statements Is Correct Regarding Total Risk