Risks Flashcards
1
Q
What is systematic risk
A
Market risk that cannot be diversified
2
Q
What is unsystematic risk?
A
Risk of the investment that can be eliminated through diversification.
3
Q
What does CAPM use to capture systematic risk?
A
Market rate of return
4
Q
What does Arbitrage pricing model use to capture systematic risk?
A
It uses a series of risk factors to develop a value that reflects dimensions of systematic risk.
ex: future oil prices
exchange rates
interest rates
5
Q
Elements of Arbitrage Pricing Model
A
risk premium
risk free interest rate
beta
market interest rate
6
Q
CAPM and Arbitrage Pring Model
A
Both use systematic risks
CAPM uses market rate of return only
Arbitrage uses market rate of return plus other factors like
interest rates
future oil prices
interest rates
