Analysts Linda Yarbrough and Pamela Burke recently discussed the application of the market model. Yarbrough comments that, assuming betas remain constant, the market model prediction of the covariance between any two assets rises during a period of rising market volatility. Burke states that the market model prediction of covariance will not be correct if the firm's unique components of asset returns are correlated. Are the statements of Yarbrough and Burke correct?

Question 14Answer

a.

Neither statement is correct.

b.

Both statements are correct.

c.

Only one of the statements is correct.