According to the CAPM, _____.
A) investors should expect to be rewarded for the total risk associated with an individual investment, total risk being measured by the standard deviation of returns
B) investors should expect to be rewarded for only the unsystematic risk associated with an individual investment, unsystematic risk being measured by the standard deviation of returns
C) investors should expect to be rewarded only for the systematic risk associated with an individual investment, systematic risk being measured by the standard deviation of returns
D) investors should expect to be rewarded for only the unsystematic risk associated with an individual investment, unsystematic risk being measured by the beta coefficient
E) investors should expect to be rewarded for only the systematic risk associated with an individual investment, systematic risk being measured by the beta coefficient

Question

Quizplus · Accepted Answer

According to the CAPM, investors should be rewarded for the systematic risk associated with an individual investment, as measured by the beta coefficient. Systematic risk is the risk that cannot be diversified away and is inherent to the overall market or economy. Therefore, investors should not be rewarded for unsystematic risk, which can be diversified away by holding a well-diversified portfolio.