Why should stock market investors ignore specific risks when calculating required rates of return?
A) There is no method for quantifying specific risks.
B) Specific can be diversified away.
C) Specific risks are compensated by the risk-free rate.
D) Beta includes a component to compensate for specific risk.

Question

Quizplus · Accepted Answer

Specific risks can be diversified away by holding a well-diversified portfolio, so there is no need to adjust the required rate of return for these risks. Investors should only focus on systematic risks which cannot be diversified away and are therefore relevant for determining expected returns.

Why Should Stock Market Investors Ignore Specific Risks When Calculating