CFA Level I · CFA Level I Exam · Portfolio Risk and Return: Part II
In the capital asset pricing model (CAPM), the risk premium that investors require for holding a security is most likely determined by the security's:
The required risk premium depends on beta. Beta measures systematic risk that cannot be diversified away, and CAPM says investors are compensated only for bearing that risk. Total risk and unsystematic risk can be diversified, so the market does not pay a premium for them.
- AbetaCorrect
- Btotal standard deviation
- Cunsystematic variance
Explanation
CAPM states that only systematic risk, measured by beta, is rewarded with a risk premium. Total standard deviation includes diversifiable risk, and unsystematic variance can be eliminated by diversification, so neither earns a premium.
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