Use the following three statements to answer this question:
I.The CAPM points out that rational investors should be compensated for unique risk.
II.The CAPM implies that non-systematic risk is the appropriate measure of risk to determine the risk premium required by investors for holding a risky security.
III.The expected portfolio return from non-systematic risk is zero.
A)I, II and III are correct.
B)I and II are incorrect, III is correct.
C)I, II are correct, III is incorrect.
D)I, III are incorrect, II is correct.

Question

Quizplus · Accepted Answer

I. The CAPM (Capital Asset Pricing Model) actually suggests that investors are compensated for systematic risk (market risk), not unique (unsystematic) risk. II. The CAPM focuses on systematic risk, not non-systematic risk, as the relevant risk for determining the risk premium. III. Non-systematic risk can be diversified away, and thus, its expected return is considered to be zero in a well-diversified portfolio, which aligns with the principles of CAPM.

Use the Following Three Statements to Answer This Question