What is the CAPM's basic treatment of idiosyncratic risk?
A) It is the most important factor in the model
B) It is irrelevant because it can be diversified away
C) It is somewhat important, but not as important as systematic risk
D) It is a primary indicator of future returns

Question

Quizplus · Accepted Answer

The Capital Asset Pricing Model (CAPM) posits that idiosyncratic risk, which is unique to individual assets, can be eliminated through diversification. Therefore, it considers this type of risk irrelevant for a well-diversified portfolio, focusing instead on systematic risk, which affects all investments.

What Is the CAPM's Basic Treatment of Idiosyncratic Risk