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Answer: Beta identifies the appropriate level of risk for which an investor should be compensated.
## Explanation Let's analyze each statement: **Option A: CORRECT** - Beta measures systematic risk in CAPM - Investors are only compensated for systematic risk (non-diversifiable risk) - Beta identifies the appropriate level of risk for which investors should be compensated **Option B: INCORRECT** - Unsystematic risk IS diversifiable through portfolio diversification - There is NO reward for taking on unsystematic risk because it can be eliminated **Option C: INCORRECT** - According to CAPM, assets with equivalent betas should earn the same expected return - The security market line (SML) shows that expected return is linearly related to beta **Answer: A**
Author: LeetQuiz Editorial Team
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Which of the following statements concerning the capital asset pricing model (CAPM) and the security market line (SML) is correct?
A
Beta identifies the appropriate level of risk for which an investor should be compensated.
B
Unsystematic risk is not diversifiable, so there is no reward for taking on such risk.
C
Assets with equivalent betas will always earn different returns.
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