Question
In: Finance
According to the CAPM the market does not need to pay for riskthat could have...
According to the CAPM the market does not need to pay for risk that could have been diversified away. True or False?
Solutions
Expert Solution
ANSWER - TRUE
This pricing model describes the relationship between Systematic risk(Undiversifiable risk) and expected return on the stock. Even you try to diversify all the risk but still there will be some risk which cannot be diversified. So, the market only pays for the risk which cannot be diversified.
Formula of CAPM- Expected return = Risk free rate +
(Beta*(Market return - Risk free rate))
so the above statment is true
jeff jeffy answered 1 year agoRelated Solutions
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