Question

An increase in nondiversifiable risk

A.

would cause a decrease in the beta and​ would, therefore, lower the required rate of return.

B.

would cause an increase in the beta and would lower the required return.

C.

would cause an increase in the beta and would increase the required return.

D.

would have no effect on the beta and​ would, therefore, cause no change in the required return.

Answer 1

Hi,

A non diversifiable risk is the risk which cannot be reduced or eliminated by adding an asset to diversified portfolio.

It is known as systematic risk also.

Beta is also a measure of systematic or non diversifiable risk. which increases if risk increases.

So increase in nondiversifiable risk would increase beta and beta is directly proportionate to return so with increase in beta, required return will also increase.

Hence option C is correct here.

Thanks