A Security Has a Zero Covariance with the Market

question 57

Multiple Choice

A security has a zero covariance with the market. This means that:

• A)the return on the security is always equal to that of the market.
• B)the return on the security moves in the same direction as the market return.
• C)the security is a risk-free security.
• D)there is no identifiable relationship between the return on the security and that of the market.
• E)the return on the security must vary more than that of the market.

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Definitions:

Beta

A measure of a stock's volatility in comparison to the overall market, indicating its relative riskiness.

Cost of Equity

The return that investors expect to receive from an investment in a company, representing compensation for the risk of investing in the equity.

Risk-Free Rate

The theoretical return on an investment with no risk of financial loss, often represented by the yield on government bonds.

Project Life

The duration over which a project is expected to operate or be active, from commencement to completion.