Question

Which statements are true according to the CAPM? Check all that apply: The higher the risk, the higher the expected reward. Only systematic risk matters for the expected reward. There is reward for bearing risk. Total risk matters for the expected reward.

Answer 1

All the statements excepting statement 4 are correct.

The CAPM model is :

Re = Rf + beta (Rm - Rf)

Here, the expected return on the security, is dependent on the systematic risk which is the beta. As per the CAPM, a security is affected only by the systematic risk. The higher the risk of a security, the higher will be the reward. Yes, it is also true that investors are rewarded for bearing risk.

CAPM does not pay attention to total risk, but only to systematic risk.

So, the correct option is option 1, 2 and 3.