Can you discuss how CAPM handles non-diversifiable risk?

CAPM specifically addresses non-diversifiable risk, also known as systematic or market risk. This is the risk inherent to the entire market or market segment. CAPM posits that this is the only type of risk for which investors should receive an expected return, as unsystematic risk can be diversified away. In CAPM, an asset's sensitivity to non-diversifiable risk is measured by its beta, which is used to calculate the appropriate expected return for the asset, taking into account this type of risk.

Interview Questions Asset Pricing Non-Diversifiable Risk

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Non-Diversifiable Risk

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