CFA Level I · CFA Level I Exam · Portfolio Risk and Return: Part II
Under the capital asset pricing model, an investor holding a well-diversified portfolio is most likely to receive a risk premium for bearing:
The investor is compensated for systematic risk only. Firm-specific risk can be eliminated by diversification, so the market does not pay a premium for it. Expected return under CAPM depends on beta, the measure of exposure to systematic risk.
- Asystematic risk onlyCorrect
- Btotal risk, including firm-specific risk
- Cnonsystematic risk, because it is more volatile
Explanation
Because nonsystematic risk can be diversified away at little cost, the market does not compensate for it. Only systematic risk, measured by beta, earns a risk premium. Total risk is rewarded only in the sense that it contains the systematic component.
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