Which of the following statements is true?
A)In CAPM, it is assumed that systematic and unsystematic risk are positively correlated.
B)In CAPM, it is assumed that systematic and unsystematic risk are negatively correlated.
C)In CAPM, it is assumed that systematic and unsystematic risk are independent of each other.
D)None of the listed options are correct.

Question

Quizplus · Accepted Answer

According to the Capital Asset Pricing Model (CAPM), systematic risk (measured by beta) and unsystematic risk are independent of each other. Systematic risk cannot be diversified away, while unsystematic risk can be reduced through diversification. Therefore, CAPM assumes that investors are only compensated for taking systematic risk, and not for bearing unsystematic risk.

Which of the Following Statements Is True