Capital Asset Pricing Theory asserts that portfolio returns are best explained by:
A) economic factors.
B) specific risk.
C) systematic risk.
D) diversification.
E) none of these.

Question

Quizplus · Accepted Answer

Capital Asset Pricing Theory (CAPM) is based on the assumption that portfolio returns are best explained by systematic risk, which is measured by a security's beta. Specific risk (also known as idiosyncratic risk) is not a factor that affects overall portfolio returns, as it can be diversified away. Economic factors may impact the market as a whole, but they do not necessarily explain the returns of individual securities or portfolios. Diversification is a strategy to reduce risk, but it does not explain the factors driving returns.

Capital Asset Pricing Theory Asserts That Portfolio Returns Are Best