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Answer: Systematic risk, as it is non-diversifiable and investors are rewarded for bearing it.
In capital market theory, only systematic risk (non-diversifiable risk) is priced because it cannot be eliminated through diversification. Investors are compensated for bearing systematic risk, as it affects the entire market. Conversely, nonsystematic risk (diversifiable or idiosyncratic risk) pertains to individual companies or industries and can be mitigated by diversifying the portfolio. Therefore, investors do not receive additional returns for bearing nonsystematic risk.
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According to capital market theory, which type of risk is compensated in asset pricing?
A
Systematic risk, as it is non-diversifiable and investors are rewarded for bearing it.
B
Diversifiable risk, as it can be eliminated through portfolio diversification.
C
Idiosyncratic risk, as it is specific to individual companies or industries.
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