The capital asset pricing theory is based on the premise that:
A) only unsystematic variability in cash flows is relevant.
B) only systematic variability in cash flows is relevant.
C) both systematic and unsystematic variability in cash flows are relevant.
D) neither systematic nor unsystematic variability in cash flows is relevant.

Question

The capital asset pricing theory is based on the premise that:​
A) ​only unsystematic variability in cash flows is relevant.
B) ​only systematic variability in cash flows is relevant.
C) ​both systematic and unsystematic variability in cash flows are relevant.
D) ​neither systematic nor unsystematic variability in cash flows is relevant.

Quizplus · Accepted Answer

The CAPM assumes that only the systematic variability in cash flows, measured by beta, is relevant for determining the expected return on an asset. It assumes all investors hold a well-diversified portfolio and thus are only concerned with the systematic risk of their portfolio, which is reflected in the market risk premium.

The Capital Asset Pricing Theory Is Based on the Premise