Explanation:
The investor should only be compensated for systematic risk or beta. Since CAPM assumes that there are no transaction costs, and an investor can diversify free of cost, the investor does not need to be compensated for diversifiable risks, i.e., unsystematic or asset-specific risk.
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Q.68 According to the Capital Asset Pricing Model (CAPM), which of the following risks should an investor be compensated for?
I. Unsystematic risk
II. Asset-specific risk
III. Systematic risk
A
I only
B
III only
C
I and II only
D
I and III only
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