Explanation

Option A is correct because:

• In CAPM, beta (β) measures systematic risk - the risk that cannot be diversified away
• The security market line (SML) shows the relationship between expected return and systematic risk (beta)
• Investors are only compensated for bearing systematic risk, which is measured by beta
• The CAPM formula is: E(Ri) = Rf + βi × (E(Rm) - Rf), where beta determines the risk premium

Option B is incorrect because:

• Unsystematic risk IS diversifiable through portfolio diversification
• Since unsystematic risk can be eliminated through diversification, investors are NOT compensated for taking on such risk
• The statement incorrectly claims unsystematic risk is "not diversifiable"

Option C is incorrect because:

• According to CAPM, assets with equivalent betas should earn the same expected returns
• The SML shows that all assets with the same beta lie on the same point on the line
• If assets with the same beta earned different returns, it would create arbitrage opportunities

Key CAPM Concepts:

• Only systematic risk (measured by beta) is rewarded
• Unsystematic risk can be eliminated through diversification
• SML shows the linear relationship between expected return and systematic risk