NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Introduction to Modern Portfolio Theory
In the Capital Asset Pricing Model, which risk is rewarded with a risk premium for an investor who holds a well-diversified portfolio?
Systematic risk measured by beta is rewarded. A well-diversified investor has already eliminated company-specific risk, so the market pays no premium for it, while market-wide risk cannot be diversified away and therefore earns compensation under CAPM.
- AUnsystematic risk of individual companies
- BSystematic risk measured by betaCorrect
- CCompany-specific business risk
- DRisk that can be removed by adding more securities
Explanation
Diversification removes unsystematic (company-specific) risk, so the market does not pay a premium for bearing it. Only systematic risk, which cannot be diversified away and is measured by beta, earns a premium under CAPM.
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