The capital asset pricing model predicts that corporate diversiﬁcation that reduces the unsystematic risk of a company's securities will result in those securities being higher valued by the stock market.

Question

Quizplus · Accepted Answer

The capital asset pricing model (CAPM) suggests that only systematic risk (market risk) is rewarded by the market, and thus, reducing unsystematic risk (specific to a company) through diversification does not affect a security's value according to CAPM, as investors can diversify such risk themselves.

The Capital Asset Pricing Model Predicts That Corporate Diversiﬁcation That