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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.

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False, the capital asset pricing model (CAPM) assumes that all securities are priced according to their systematic risk. Unsystematic or Idisoyncratic or Unique risk is diversifiable risk and can be diversified away by addition of random low correlated stocks in the portfolio. As this diversification is achievable without any cost, there is no compensation for unsystematic risk. The investors are only compensated for the systematic or market risk as this risk is non diversifiable and cannot be diversified away.

jeff jeffy answered 2 years ago
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