________ measures, which relate to the total variability of actual returns (i.e. beta), indicate the risk of having returns different from that particular benchmark or index.
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A. B. C. D.C
It is very important not to confuse risk with volatility. The type of risk that volatility measures represent are only one of many risks.
The correct answer to the question is C. Volatility.
Volatility measures, specifically beta, provide an indication of the risk associated with having returns that are different from a particular benchmark or index. Let's break down the concepts involved to understand why volatility is the appropriate answer.
Benchmark or Index: A benchmark or index represents a specific market or sector against which the performance of an investment or portfolio is compared. It serves as a reference point to evaluate the relative performance of an investment.
Beta: Beta is a measure of systematic risk or the sensitivity of an investment's returns to the overall market movements represented by the benchmark or index. It quantifies the relationship between the returns of an investment and the returns of the benchmark. A beta value greater than 1 indicates that the investment tends to move more than the benchmark, while a beta value less than 1 suggests it moves less.
Actual Returns: Actual returns refer to the realized returns of an investment or portfolio over a specific period. These returns are influenced by various factors, including the performance of the benchmark/index.
Variability: Variability, in this context, refers to the extent to which the actual returns of an investment deviate from the returns of the benchmark or index. It measures the degree of fluctuation or dispersion in the investment's returns compared to the benchmark.
Risk: In the context of the question, risk refers to the possibility of having returns that differ from the benchmark or index. It encompasses the potential for both positive and negative deviations.
Volatility: Volatility is a statistical measure that quantifies the dispersion or variability of returns for a given investment or portfolio. It provides an understanding of how much an investment's returns fluctuate over time. Higher volatility implies greater uncertainty and potential for larger deviations from the benchmark.
Therefore, when the question asks for the measure that relates to the total variability of actual returns and indicates the risk of having returns different from a particular benchmark or index, the correct answer is C. Volatility. Volatility, as captured by beta, helps assess the risk associated with an investment's performance relative to a benchmark or index.