Security returns

Question

Security returns

BlackTom AI · Accepted Answer

Return on a security has two components: systematic (macro) and idiosyncratic (firm‑specific).

1. Relevant knowledge points and concepts
- Systematic (market or macro) risk: factors like GDP, interest rates, inflation, or market‑wide news that affect many securities simultaneously. Captured in models as beta × market return (e.g., CAPM).
- Idiosyncratic (firm‑specific) risk: events unique to a firm (management changes, lawsuits, product success) that affect only that firm’s return.
- Total return decomposition: security return = expected return + systematic component + idiosyncratic (residual) component.

2. Step‑by‑step reasoning
- Start with the decomposition: R_i = α_i + β_i R_m + ε_i, where β_i R_m is the macro/systematic effect and ε_i is firm‑specific.
- Macro events (R_m) simultaneously move many securities, generating co‑movement across returns.
- Firm‑specific shocks (ε_i) move only a single security and can be diversified away in a portfolio.
- Therefore security returns depend on both macro events (through β) and firm‑specific events (through ε).

3. Calculations (conceptual)
- No numeric calculation is required; the algebraic decomposition R_i = β_i R_m + ε_i demonstrates the two distinct components. Variance(R_i) = β_i^2 Var(R_m) + Var(ε_i) + 2β_i Cov(R_m, ε_i) (ε_i typically assumed uncorrelated with market).

4. Why the correct answer is correct
- The option "are based on both macro events and firm‑specific events" directly matches the decomposition above: both types of factors determine individual security returns.

5. Why other options are incorrect
- "Firm‑specific events only": false because market/macro factors clearly influence prices (systematic risk).
- "Usually positively correlated with each other": incorrect because correlation depends on exposures; some securities may be uncorrelated or negatively correlated depending on industry and betas.
- Combined options asserting both firm‑specific only and usually positively correlated are internally inconsistent or incorrect for the same reasons.

6. Conclusion
- Confirmed: the correct choice is "are based on both macro events and firm‑specific events," which matches the provided answer.

Security returns单项选择题

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