The total risk of the S&P 500 Index is equal to:

• A. The sum of systematic risk and unsystematic risk
• B. The standard deviation of the index's returns
• C. The beta coefficient of the index
• D. Only the unsystematic risk of the index

Answer: (B)

Verified step by step guidance

1. Understand the concept of 'total risk' in financial accounting, which refers to the overall variability in returns of an investment or index. It is typically measured using the standard deviation of returns.
2. Recognize that systematic risk refers to market-wide risks that affect all securities, such as economic changes or political events, and cannot be diversified away.
3. Understand that unsystematic risk refers to risks specific to a company or industry, which can be reduced or eliminated through diversification.
4. Learn that the standard deviation of the index's returns is the correct measure of total risk because it captures both systematic and unsystematic risks.
5. Review why other options, such as the beta coefficient (which measures systematic risk only) or unsystematic risk alone, do not represent the total risk of the index.