In the context of the Capital Asset Pricing Model (CAPM), the relevant risk is

Question

BlackTom AI · Accepted Answer

We begin by restating the core question: In the context of the Capital Asset Pricing Model (CAPM), the relevant risk is what?

First, recall a key principle of CAPM: investors are compensated for bearing systematic (market) risk, which cannot be diversified away, while idiosyncratic (firm-specific) risk can be eliminated through diversification. This distinction underpins the idea that only certain risk factors matter for expected returns.

Next, consider the concept of market risk (also called systematic risk): it arises from broad economic factors that affect almost all assets, such as changes in interest rates, inflation, or market-wide beta movements. In CAPM, this risk is captured by the asset's beta, which measures sensitivity to the overall market. Because this risk is non-diversifiable, it directly influences the expected excess return demanded by investors.

Now, if we imagine typical answer options, the one reflecting this core idea would identify market risk (systematic risk) as the relevant risk in CAPM.

If an option suggested that only firm-specific risk mattered, that would be incorrect because diversifiable risk does not affect the market-wide required return once a portfolio is well diversified. If another option claimed that only total volatility or standard deviation matters without separating systematic from idiosyncratic components, that would be misleading in CAPM terms, since CAPM’s pricing hinges on beta, not total variance alone. If an option claimed that risk is unrelated to market movements or that all risks are equally priced, that would contradict the fundamental CAPM relationship between expected return and beta.

In summary, the framework hinges on distinguishing between market (systematic) risk, which is priced, and firm-specific (idiosyncratic) risk, which is not. The CAPM formulation implies that the relevant risk for expected return is the portion of risk that moves with the overall market, i.e., market risk.

Note: The provided options list is missing in this instance, so the analysis centers on the CAPM principles described above and how they identify market risk as the relevant risk for pricing assets.

FINS5513-Investments & Portfolio Sel. T1 2025

In the context of the Capital Asset Pricing Model (CAPM), the relevant risk is

查看解析

登录即可查看完整答案

类似问题

What is the primary distinction between market risk in the trading book versus the banking book?

An unexpected post on social media caused the prices of 22 different companies’ stocks to immediately increase by 10 to 15 percent. This occurrence is best described as an example of ________ risk.

Which type of risk involves financial loss due to market fluctuations?

Inflation, recession, and high interest rates are economic events that are best characterized as being

Market risk tends to rise when recent news has been more surprising than before.

Market risk tends to rise when the market anticipates important but uncertain news events.

Market risk tends to rise when recent news has been more surprising than before.

Market risk tends to rise when the market anticipates important but uncertain news events.

更多留学生实用工具

考试浏览器助手

风格化写作助手

论文查重助手

文献引用助手

课堂转译助手

课堂笔记助手

Quiz搜索助手

学校历年真题

智能刷题助手

智能匹配练习

希望你的学习变得更简单