Which of the following statements about systematic risk is/are true?

Question

BlackTom AI · Accepted Answer

First, consider the statement options in the context of systematic risk. 
Option 1: The systematic risk of a firm is given by that firm’s asset beta. In asset pricing and CAPM terminology, the systematic risk of a firm is captured by its beta (the sensitivity of the asset's returns to market returns). The asset beta reflects how much of the firm’s risk is related to broad market movements, i.e., systematic risk. Therefore, this option aligns with standard theory. 
Option 2: Systematic risk can be diversified away. This is incorrect because systematic risk arises from broad market factors that affect all firms, such as economic growth, inflation, or monetary policy. These factors cannot be eliminated through diversification, only idiosyncratic (firm-specific) risk can be diversified away. 
Option 3: A & B. Since Option 2 is false, combining it with Option 1 makes this composite statement false as well. The conjunction claims both are true, but one part is not. 
Option 4: Neither A nor B. Since Option 1 is true, this option is false because it asserts that neither statement is true. 
In summary, the only statement that coherently matches the standard understanding of systematic risk is that it is captured by the firm’s beta, while the notion of diversifying away systematic risk is incorrect. The reasoning above clarifies why the other options do not hold under conventional finance theory.

MSB-250-300-002 Proctored Midcourse Exam 2

Which of the following statements about systematic risk is/are true?

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