Answer: systematic risk only.

## Explanation According to the Capital Asset Pricing Model (CAPM), the expected return of an asset is determined solely by its systematic risk (beta), not by its unsystematic risk. The CAPM formula is: $$E(R_i) = R_f + \beta_i[E(R_m) - R_f]$$ Where: - $E(R_i)$ = expected return of asset i - $R_f$ = risk-free rate - $\beta_i$ = beta of asset i (measure of systematic risk) - $E(R_m)$ = expected return of the market portfolio **Key points:** 1. **Systematic risk (beta)** is the only risk factor that is priced in the CAPM framework. 2. **Unsystematic risk** (idiosyncratic risk) can be diversified away in a well-diversified portfolio and is not rewarded with higher expected returns. 3. **Total variance** = systematic variance + unsystematic variance Given that: - Both assets are correctly priced according to CAPM - They have the same expected variance of returns - They have different expected returns **Analysis:** - Since expected returns differ, their betas (systematic risk) must differ according to the CAPM formula. - The same total variance can be achieved with different combinations of systematic and unsystematic risk. - If both assets have the same total variance but different betas, then their unsystematic risk must also differ to maintain the same total variance. However, the question specifically asks what **must** have different levels. The only thing that **must** differ is systematic risk, because: 1. Different expected returns → different betas (systematic risk) according to CAPM 2. Unsystematic risk could be the same or different - it's not determined by the CAPM relationship **Example:** - Asset A: Beta = 1.0, Unsystematic variance = 0.04, Total variance = 0.09 - Asset B: Beta = 1.5, Unsystematic variance = 0.015, Total variance = 0.09 Both have same total variance (0.09) but different expected returns (due to different betas) and different unsystematic risk. But unsystematic risk doesn't have to differ - it could be adjusted to maintain the same total variance. **Therefore, the correct answer is A: systematic risk only.**

Author: LeetQuiz .