According to the capital asset pricing model
A)only the systematic component of risk affects the required return
B)foreign investments whose returns are uncorrelated with the market's return should have a higher required return than comparable domestic investments
C)total risk of the investment is most relevant for small to medium-sized firms
D)diversification is secondary to risk levels of the investment

Question

Quizplus · Accepted Answer

According to the Capital Asset Pricing Model (CAPM), only the systematic risk, also known as market risk, affects the required return of an investment. This is because diversifiable risk, also known as unsystematic risk, can be eliminated through diversification. Therefore, the required return is solely dependent on the systematic risk of the investment.