Back to Assignment Attempto Do No Harm/11 2. CAPM, Portfolio Risk, and Return (Formula Approach) 1. Quick Take CAPM Portfolio Risk, and Return 2. Leam it. CAPM Portfolio Risk, ... 3. Praction: CAPM Portfolio Risk, STEP: 1 of 3 CAPM, portfolio risk and return are fundamental concepts in finance. Re the following text and answer the question that follows. 5.0 The capital asset pricing model (CAPM) is a model that assumes that the required rate of return on a stock is equal to the risk-free rate plus a risk premium. This risk premium is determined by the risk remaining after diversification. The implications of such a model lead to important intuitions about risk in the context of a portfolio (multiple stocks or assets held together). Consider a portfolio of multiple stocks. The expected return of the portfolio is simply the weighted average of the expected returns of each stock in the portfolio. However, the risk (as measured by the standard deviation of expected returns) of the portfolio is not equal to the weighted average of the risk of the individual stocks. The risk of the portfolio as a whole is usually smaller than the weighted average of the risk of the stocks (unless the stocks are perfectly positively correlated), because of diversification. However, not all risk can be eliminated with diversification. Market risk is the risk that remains after all diversifiable risk has been eliminated. Thus, when a stock is held in a diversified portfolio, the riskiness or a stock is measured by the degree to which the stock contributes to the portfolio's market risk. In other words, the risk of a stock in a well diversified portfolio is measured by how that stock moves (up or down) with the broader market. This is measured by a stock's beta coefficient. The beta for a portfolio as a whole is simply the weighted average beta of the securities therein. In theory, the beta of a stock is the most relevant measure of risk for that stock. True or False: The risk of a portfolio is generally not equal to the weighted average standard deviation of expected returns of each stock in the portfolio True O False Grade Step 1 TOTAL SCORE: 0/11 flo complete and unlock these