The capital asset pricing theory is based on the premise that:

only systematic variability in cash flows is relevant.

neither systematic nor unsystematic variability in cash flows is relevant.

both systematic and unsystematic variability in cash flows are relevant.

none of the above.

Expert Solution

Option A is correct: only systematic variability in cash flows is relevant

The capital asset pricing theory is based on the premise that only systematic variability in cash flows is relevant. The systematic risk also called the market risk is undiversifiable and hence the investors should be compensated for only systematic risk.

Options B and C are incorrect because CAPM considers the systematic variablity and ignores the unsystematic variablity in cash flows

The unsystematic variability in the cash flows are not relevant because investors can diversify this variability by holding stocks of many companies in the portfolio.

jeff jeffy answered 2 years ago

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Question

The capital asset pricing theory is based on the premise that:

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