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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 2 years ago
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