Which one of the following statements is accurate?

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BlackTom AI · Accepted Answer

Let’s break down each statement and assess its accuracy in the context of portfolio theory and risk decomposition.
Option 1: 'Beta measures the level of unsystematic risk inherent in an individual security.' Beta actually measures systematic risk (market-related risk) of a security, not unsystematic risk. Unsystematic risk is diversifiable and not captured by beta, so this statement is incorrect.
Option 2: 'Eliminating unsystematic risk is the responsibility of the individual investor.' This aligns with the core idea that unsystematic (diversifiable) risk can be reduced or eliminated through diversification across a broader set of assets. The investor bears the responsibility to diversify to mitigate this risk, making this statement correct.
Option 3: 'An investor should expect to be rewarded for assuming unsystematic risk.' In efficient markets, diversifiable risk is not rewarded with higher expected return because it can be mitigated through diversification. Therefore, this claim is false.
Option 4: 'Unsystematic risk is rewarded when it exceeds the market level of unsystematic risk.' This mixes concepts awkwardly: there isn’t a market-wide benchmark that you’re rewarded for unsystematic risk beyond what diversification achieves; systematic risk drives rewarded returns, not unsystematic risk. Hence this option is incorrect.
Option 5: 'Standard deviation is a measure of unsystematic risk.' Standard deviation measures total risk (the dispersion of returns), not exclusively unsystematic risk. It does not distinguish between systematic and unsystematic components, so this statement is misleading and false.

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Which one of the following statements is accurate?

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