The capital asset pricing theory is based on the premise that: a. only unsystematic variability in cash flows is relevant. b. only systematic variability in cash flows is relevant. c. both systematic and unsystematic variability in cash flows are relevant. d. neither systematic nor unsystematic variability in cash flows is relevant.

Question

Deon Drake

Business

6 March, 08:40

The capital asset pricing theory is based on the premise that: a. only unsystematic variability in cash flows is relevant. b. only systematic variability in cash flows is relevant. c. both systematic and unsystematic variability in cash flows are relevant. d. neither systematic nor unsystematic variability in cash flows is relevant.

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Answers (1)

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Kate Lester · Answer 1

Option B Only systematic variability in cash flows is relevant

Explanation:

The reason is that CAPM assumes that all the investors have well diversified investments which completely eliminates the unsystematic risk. This means that the firm will only compensate for the business systematic risk which is relevant. So the right answer here which talks about only the systematic risk is option B