Question

In: Finance

CAPM assumes that only market risk matters, unsystematic risk does not matter in asset pricing a....

CAPM assumes that only market risk matters, unsystematic risk does not matter in asset pricing

a. True

b. False

Solutions

Expert Solution

CAPM calculates expected return on security based on systematic risk.

Expected Return= risk free rate+beta*(return from market - risk free rate)

Beta is a measure that will tell fluctuations in stock price based on fluctuations in overall market. Systematic risk is denoted by Beta.

Hence we can see from the model there is no incorporation for unsystematic risk in calculating expected return.

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

According to the capital asset pricing model (CAPM) the only risk that matters is “market risk”,...
According to the capital asset pricing model (CAPM) the only risk that matters is “market risk”, captured by beta (β). What type of risk is this and what does it entail? Why are all other types of risk less important? Do you agree with the CAPM view on risk or not?
According to the capital asset pricing model (CAPM) the only risk that matters is “market risk”,...
According to the capital asset pricing model (CAPM) the only risk that matters is “market risk”, captured by beta (β). What type of risk is this and what does it entail? Why are all other types of risk less important? Do you agree with the CAPM view on risk or not?
The capital asset pricing model (CAPM) assumes that all securities are priced according to their unsystematic...
The capital asset pricing model (CAPM) assumes that all securities are priced according to their unsystematic risk. Discuss the validity of this statement. paragraph answer:
“The Capital Asset Pricing Model [CAPM] assumes that the stock market is dominated by well-diversified investors...
“The Capital Asset Pricing Model [CAPM] assumes that the stock market is dominated by well-diversified investors who are concerned with specific risk. “ Do you agree with the following statement? And explain why.
The CAPM is a one- factor asset- pricing model- it assumes that stocks’ returns are determined...
The CAPM is a one- factor asset- pricing model- it assumes that stocks’ returns are determined by returns on the market plus random factors that affect individual stocks. However, some analysts and professionals argue that multi-factor models describe investor behavior better than the CAPM. What is a multi-factor model, and how could one test such models against the CAPM? (Note: Multi-factor models have been tested to see if they work better than the pure CAPM, but the results have been...
The Capital Asset Pricing Model (CAPM) designates the risk-return tradeoff existing in the market, where risk...
The Capital Asset Pricing Model (CAPM) designates the risk-return tradeoff existing in the market, where risk is defined in terms of diversifiable risk. T/F
What is the Capital Asset Pricing Model (CAPM) and how does the security market line illustrate...
What is the Capital Asset Pricing Model (CAPM) and how does the security market line illustrate how this model works?
What is the Capital Asset Pricing Model (CAPM) and how does the security market line illustrate...
What is the Capital Asset Pricing Model (CAPM) and how does the security market line illustrate how this model works?
(Asset pricing) ”The CAPM is a good measure of risk and thus a good explanation of...
(Asset pricing) ”The CAPM is a good measure of risk and thus a good explanation of the fact that some assets (stocks, portfolios, strategies or mutual funds) earn higher average returns than others.” Comment.
1. Discuss the capital asset pricing model, including systematic and unsystematic risk and return, and how...
1. Discuss the capital asset pricing model, including systematic and unsystematic risk and return, and how to avoid risk. 2. Discuss the three forms of the efficiency market hypothesis
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT