alleryStart learning →Beta is relevant to investors because it measures the risk that is:
ACaused by accounting
BNot diversified away
CFully diversified away
DUnique to one company
Answer & Solution
Correct answer: B. Not diversified away
1. Beta measures whichever risk actually matters after diversification.
2. Portfolio diversification protects against unsystematic risk.
3. The relevant risk for investors is the systematic risk they incur.
4. Systematic risk is the risk of holding the market portfolio.
5. So beta measures the risk that diversification does not remove.
_Source: OpenStax Principles of Finance (CC BY 4.0), Ch 15 'Risk, Return, and Capital Market Theory'_
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