Asked by Thais De Charentenay on Jul 16, 2024
Verified
According to the Capital Asset Pricing Model (CAPM) , a well diversified portfolio's rate of return is a function of
A) beta risk.
B) unsystematic risk.
C) unique risk.
D) reinvestment risk.
E) None of the options are correct.
Beta Risk
A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.
Diversified Portfolio
An investment portfolio constructed to spread risk by selecting assets across various classes.
Rate of Return
The gain or loss on an investment over a specified period, expressed as a percentage of the investment's cost.
- Explain the significance of beta in measuring a security's market risk.
Verified Answer
RR
Rahul ReddyJul 20, 2024
Final Answer :
A
Explanation :
The Capital Asset Pricing Model (CAPM) posits that the expected return of a portfolio or an asset is a function of its sensitivity to the overall market movements, which is measured by beta (β), rather than unsystematic, unique, or reinvestment risks. Beta risk represents the type of risk associated with the overall market that cannot be diversified away.
Learning Objectives
- Explain the significance of beta in measuring a security's market risk.