Why should stock market investors ignore specific risks when calculating required rates of return? O There is no method for quantifying specific risks. Specific can be diversified away. Specific risks are compensated by the risk-free rate. Beta includes a component to compensate for specific risk.

Why should stock market investors ignore specific risks when calculating required rates of return? O There is no method for quantifying specific risks. Specific can be diversified away. Specific risks are compensated by the risk-free rate. Beta includes a component to compensate for specific risk.

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter11: Risk-adjusted Expected Rates Of Return And The Dividends Valuation Approach

Section: Chapter Questions

Problem 3QE

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Concept explainers

Risk and return

Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.

Capital Asset Pricing Model

Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.

Question

Why should stock market investors ignore specific risks when calculating required rates of return?
There is no method for quantifying specific risks.
Specific can be diversified away.
Specific risks are compensated by the risk-free rate.
Beta includes a component to compensate for specific risk.

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