When a firm's stockholders are not well diversified,the firm's true investment risk will not be measured by beta and the CAPM procedure will ____ the correct value of r_s.

Question

Quizplus · Accepted Answer

When stockholders are not well diversified, they are exposed to unsystematic risk, which is not captured by beta. Therefore, the CAPM, which only considers systematic risk, will understate the true required return (r_s) for these investors.

When a Firm's Stockholders Are Not Well Diversified,the Firm's True