Financial Planner

Answer: D - Before you can answer a question on systematic risk for a diversified portfolio, the beta must first be determined. The beta coefficient is a measure of systematic risk and should be used for a diversified portfolio. Beta measures the volatility of the individual asset relative to the volatility of the market. In the construction of a well-diversified portfolio, all unsystematic risk is removed. A diversified portfolio is a portfolio of systematic risk, and the beta coefficient is a measure of volatility for a diversified portfolio. If the stock has a beta of 1.0, the implication is that the stock moves exactly with the market. A beta of 1.2 is 20 percent riskier than the market and 0.8 is 20 percent less risky than the market.