Answer:
3) firm-specific risk
Explanation:
The beta coefficient measures the sensitivity of a stock's returns to changes in the overall market. A beta of 1 indicates that the stock's price moves in line with the market, while a beta greater than 1 suggests the stock is more volatile than the market, and a beta less than 1 implies the stock is less volatile than the market.
Firm-specific risk refers to the risk that is unique to a particular company and cannot be diversified away by holding a diversified portfolio of stocks. It includes factors such as management decisions, competitive position, industry trends, and company-specific events.
If a firm has high total risk but a low beta, it means that most of its risk comes from firm-specific factors rather than market movements. This situation can occur when a company is heavily influenced by internal factors that are independent of broader market trends. For example, if a company operates in a niche industry with limited exposure to overall market fluctuations, its beta may be low despite having high total risk due to the significant impact of firm-specific factors on its performance.
Therefore, a firm can have high total risk but a low beta if its firm-specific risk is high, indicating that the majority of its risk is attributable to internal factors rather than market movements.
