Asked by Santana Williams on May 26, 2024
Verified
According to the Capital Asset Pricing Model (CAPM) , a well diversified portfolio's rate of return is a function of
A) systematic risk.
B) unsystematic risk.
C) unique risk.
D) reinvestment risk.
Systematic Risk
Risk factors common to the whole economy; also called market risk or nondiversifiable risk.
Diversified Portfolio
An investment strategy that involves spreading investments across various financial instruments, industries, and other categories to minimize risk.
Rate of Return
A financial metric used to calculate the percentage profit or loss of an investment relative to its cost.
- Identify the role of systematic and unsystematic risk in CAPM.
Verified Answer
KA
Katrina AttardMay 30, 2024
Final Answer :
A
Explanation :
CAPM states that the expected return of a portfolio or an asset is mainly determined by its systematic risk, not by unsystematic or unique risks which can be diversified away. Systematic risk, also known as market risk, affects the entire market and cannot be eliminated through diversification.
Learning Objectives
- Identify the role of systematic and unsystematic risk in CAPM.