Answer:
C. A stock's beta can be calculated by comparing its returns to the market's returns over some time period because the beta coefficient measures a stock's volatility relative to market.
Explanation:
A stock`s beta is a risk assessment metric that is used to measure the volatility of a security in relation to the market. The metric compares the risk of an investment with the average market risk of that investment.
Since stock`s beta measures market risk in relation to the security, it can be calculated by comparing its returns to the market`s returns over some time period which gives beta coefficient as a result.
If beta coefficient is above 1, it means the volatility of the security is high. If it`s 1, it means the security risk equals the market risk. If it is below 1, it means the security risk is less than the market risk.
Other options are wrong.
Option A is wrong because security`beta measures security risk in relation to the market, not other securities. Option B is wrong because stock`s beta is more relevant to an investor with well-diversified portfolio to measure risks across market.
Option D is wrong because returns can be negatively correlated without any of the firm having negative beta
Option E is wrong because holding an individual stock is always riskier than combining stocks in a portfolio.
So only option C is right as described above.
