In the CAPM world, investors measure the risk of a project that your firm chooses to undertake by its
A)variance.
B)covariance with other projects in which your firm invests.
C)market beta.
D)standard deviation.

Question

Quizplus · Accepted Answer

In the CAPM world, investors measure the risk of a project that your firm chooses to undertake by its market beta, which represents the sensitivity of the project's returns to market movements. Variance and standard deviation are measures of total risk, but they do not take into account systematic risk, which is the risk associated with factors that affect the entire market. Covariance with other projects is a measure of diversifiable risk, which can be minimized through portfolio diversification. Therefore, the best choice is market beta. In the CAPM world, risk is measured by market beta, which reflects the project's sensitivity to the overall market. Variance and standard deviation are measures of volatility and are not specific to market risk. Covariance with other projects may be relevant for diversification purposes, but not for measuring the risk of a single project.

In the CAPM World, Investors Measure the Risk of a Project