CAPM Flashcards
1
Q
What is systematic risk?
A
Systematic risk is the risk that is inherent with the market.
Systematic risk can’t be eliminated by diversification
2
Q
What is Unsystematic Risk?
A
Unsystematic risk is specific risk that relates to the individual holding the investment
Unsystematic risk can be diversified away.
3
Q
How is CAPM used in project appraisal?
A
CAPM can be used to set a minim required rate of return
4
Q
What are the weaknesses of CAPM?
A
1) Assumes company’s shareholders are diversified
2) Assumes that shareholders are the only participants in the firm
3) Assumes a perfect capital market
