alleryStart learning →Under CAPM, an asset with higher systematic risk should offer an expected return that is:
AIdentical to all
BExactly at zero
CHigher than others
DLower than others
Answer & Solution
Correct answer: C. Higher than others
1. CAPM ties reward to the risk that cannot be diversified.
2. CAPM is based on the idea that investors holding higher systematic risk are rewarded.
3. They should be rewarded more for taking on this market risk.
4. The equation makes expected return rise with that risk.
5. So higher systematic risk means a higher expected return.
_Source: OpenStax Principles of Finance (CC BY 4.0), Ch 15 'Risk, Return, and Capital Market Theory'_
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