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CFA Level I · CFA Level I Exam · The Capital Asset Pricing Model, Market Model, and Other Factor-Based Equity Models

Which statement about the CAPM is most accurate?

A stock's required return depends on its systematic risk. Under the CAPM, diversifiable risk can be removed by holding a diversified portfolio, so the market does not reward it. Beta captures the non-diversifiable risk that determines the risk premium, not total standard deviation.

  1. AInvestors are rewarded for bearing diversifiable risk.
  2. BA stock's required return depends on its systematic risk.Correct
  3. CRequired return depends on a stock's total standard deviation.

Explanation

In the CAPM, diversifiable (unsystematic) risk can be eliminated in a diversified portfolio, so it earns no premium. Only systematic risk, measured by beta, determines required return. Total standard deviation includes diversifiable risk and is not the pricing measure.

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