According to capital asset pricing theory, the key determinant of portfolio returns is ________.
A) the degree of diversification
B) the systematic risk of the portfolio
C) the firm-specific risk of the portfolio
D) economic factors

Question

Quizplus · Accepted Answer

According to capital asset pricing theory, the key determinant of portfolio returns is the systematic risk of the portfolio, which is measured by beta. This is because investors are assumed to be rational and risk-averse and will only be compensated for taking on systematic risk, which cannot be diversified away through diversification. Firm-specific risk, economic factors, and degree of diversification are important factors to consider, but they do not have as much impact on portfolio returns as the systematic risk.

According to Capital Asset Pricing Theory, the Key Determinant of Portfolio