The relationship between potential unsystematic risk and reward is given by ___________.

The correct answer is: A. Excess return to beta ratio.

The excess return to beta ratio is a measure of the relationship between a security’s return and its beta. Beta is a measure of a security’s volatility relative to the market. A security with a beta of 1 has the same volatility as the market, while a security with a beta of 2 has twice the volatility of the market.

The excess return to beta ratio is calculated by dividing the security’s excess return (its return over the risk-free rate) by its beta. A positive excess return to beta ratio indicates that the security has outperformed the market, while a negative excess return to beta ratio indicates that the security has underperformed the market.

The excess return to beta ratio is a useful tool for investors who are trying to identify securities that are likely to outperform the market. Securities with high excess return to beta ratios are often considered to be undervalued, while securities with low excess return to beta ratios are often considered to be overvalued.

Explanation of each option:

• A. Excess return to beta ratio: This is the correct answer. The excess return to beta ratio is a measure of the relationship between a security’s return and its beta. Beta is a measure of a security’s volatility relative to the market. A security with a beta of 1 has the same volatility as the market, while a security with a beta of 2 has twice the volatility of the market. The excess return to beta ratio is calculated by dividing the security’s excess return (its return over the risk-free rate) by its beta. A positive excess return to beta ratio indicates that the security has outperformed the market, while a negative excess return to beta ratio indicates that the security has underperformed the market.
• B. Excess return to security: This is not the correct answer. The excess return to security is a measure of the return of a security over the risk-free rate. It is calculated by subtracting the risk-free rate from the security’s return.
• C. Excess return to security square ratio: This is not the correct answer. The excess return to security square ratio is a measure of the volatility of a security’s return. It is calculated by squaring the excess return to security.
• D. Excess return to beta square ratio: This is not the correct answer. The excess return to beta square ratio is a measure of the covariance between a security’s return and the market’s return. It is calculated by multiplying the excess return to beta by itself.