Question

Indicate why you agree or disagree with the following statement: “The theories of the pricing of capital assets are highly questionable. Basically, there is only one type of risk, and investors should seek to avoid it when they purchase individual securities.”

Answer 1

I do agree with the statement that the theories of the capital asset model are highly questionable where the model works on the basis that the investor should only be compensated for the systematic risk and the nonsystematic risk can be eliminated by diversifying your portfolio. One important thing to note here is that in times of distress when the market is facing liquidity issues, almost all the securities behave in a similar way and the diversification does not really benefit and in real world scenario there are multiple risk that an investor face not just one type of risk. So the theories of the application of CAPM model in real world scenario is not that good as much in text books.