Asked by Lauren Lawlor on Jun 25, 2024
Verified
If an asset's beta is high, its:
A) diversifiable risk and expected return are high.
B) nondiversifiable risk and expected return are high.
C) diversifiable risk is high; its expected return is low.
D) nondiversifiable risk is high; its expected return is low.
E) total risk is high; its return could be any amount.
Capital Asset Pricing Model
The Capital Asset Pricing Model (CAPM) is a model that describes the relationship between systematic risk and expected return for assets, particularly stocks.
Nondiversifiable Risk
Risk that cannot be eliminated by investing in many projects or by holding the stocks of many companies.
Diversifiable Risk
Risk that can be eliminated either by investing in many projects or by holding the stocks of many companies.
- Understand the concept of diversifiable and nondiversifiable risk.
- Recognize the application and calculation within the Capital Asset Pricing Model (CAPM).
Verified Answer
AV
Agustin VelascoJul 01, 2024
Final Answer :
B
Explanation :
Beta measures an asset's nondiversifiable risk, so a high beta means that the asset's nondiversifiable risk is high. This is why the correct answer is option B. A high beta does not necessarily indicate that the expected return is high.
Learning Objectives
- Understand the concept of diversifiable and nondiversifiable risk.
- Recognize the application and calculation within the Capital Asset Pricing Model (CAPM).