The standard CAPM implies:

Question

Quizplus · Accepted Answer

The standard Capital Asset Pricing Model (CAPM) implies that investors are compensated for market risk, which is the risk that cannot be diversified away by holding a diversified portfolio. Therefore, choice B, "investors are compensated for all market risk they take," is the best choice. Choice A, "investors are compensated for all risk they take," is too broad and not accurate. Choice C, "portfolio diversification does not matter," is incorrect, as portfolio diversification is an essential tool to reduce unsystematic (company-specific) risk. Choice D, "high-return investments have higher variances than low-return investments," is a common misconception but not accurate, as the risk and return of an investment are not always directly related.

The Standard CAPM Implies