The Capital Asset Pricing Model (CAPM) states that the expected return on an asset depends upon its level of:
A) systematic risk
B) unsystematic risk
C) standard deviation divided by its beta
D) its beta divided by its standard deviation

Question

Quizplus · Accepted Answer

The CAPM states that the expected return on an asset depends upon its level of systematic risk or beta. Beta measures the asset's sensitivity to market-wide movements and is a measure of systematic risk. Therefore, Choice A is the best answer. Choice B is incorrect because unsystematic risk or idiosyncratic risk is not relevant in the CAPM. Choices C and D are incorrect because the CAPM formula uses the asset's expected return, not its standard deviation, in its calculation.

The Capital Asset Pricing Model (CAPM) States That the Expected