Home › US CMA Part 2 › Finance › Risk and Return › Under CAPM, an asset with higher systematic risk…
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'_
Related questions
An investor holding one stock rather than many is most exposed to which avoidable risk?Beta is relevant to investors because it measures the risk that is:A market-wide crash affecting nearly every stock is best classified as:A single company's accounting scandal is a risk that diversification can:A correlation coefficient is described as showing how two variables move:The relevant risk for investors is described as the risk that is:CAPM rests on the idea that investors holding stocks with higher systematic risk should beIn the CAPM equation, Rm stands for the expected return of the: