A market analyst has estimated the equity beta of Modern Homes, Inc., to be 1.4. This beta implies that the companys

Answer (B) is correct. Systematic risk, also called market risk and undiversifiable risk, is the risk of the stock market as a whole. Some conditions in the national economy affect all businesses, which is why equity prices so often move together. The effect of an individual security on the volatility of a portfolio is measured by its sensitivity to movements by the overall market. This sensitivity is stated in terms of a stock beta coefficient. An average-risk stock has a beta of 1.0 because its returns are perfectly positively correlated with those on the market portfolio.