Asked by Lauren Byrd-Moreno on Jul 13, 2024
Verified
The measure of unsystematic risk can be found from an index model as ________.
A) residual standard deviation
B) R-square
C) degrees of freedom
D) sum of squares of the regression
Unsystematic Risk
The risk associated with a specific company or industry, which can be mitigated through diversification in an investment portfolio.
Residual Standard Deviation
A measure of the amount by which an entity's observed values differ from the predicted values, indicating the precision of estimates in regression models.
Index Model
A financial model that describes the return of a security or portfolio as a function of the return of the market index, plus a residual effect unique to the security.
- Comprehend the principle of risk and return in finance along with their methods of measurement.
- Determine and describe risk indicators including variance, beta, and alpha.
Verified Answer
TC
Tejaswini ChintapalliJul 20, 2024
Final Answer :
A
Explanation :
The residual standard deviation, also known as the residual standard error, is a measure of the variability of the residuals in a regression model. Since unsystematic risk is the risk that is specific to individual assets and cannot be diversified away, it can be represented by the residual variability in the index model. Therefore, the measure of unsystematic risk can be found from an index model as the residual standard deviation.
Learning Objectives
- Comprehend the principle of risk and return in finance along with their methods of measurement.
- Determine and describe risk indicators including variance, beta, and alpha.