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1. The risk of an asset's cash flows can be considered on a stand-alone basis or in a portfolio context, in which the investment is combined with other assets and its risk is reduced through . Most rational investors hold of assets, and they are more concerned with the risk of their portfolios than with the risk of individual assets. 4. The defines the relevant risk of an individual asset as its contribution to risk of a well-diversified portfolio. Because market risk cannot be eliminated by diversification, investors must be compensated for bearing it. 5. A stock's beta coefficient (b) measures how much risk a stock contributes to a welldiversified portfolio. A stock with a beta_ than 1 has stock returns that tend to be higher than the market when the market is up but tend to be below the market when the market is down. The opposite is true for a stock with a beta less than 1. 6. The CAPM's Security Market Line (SML) equation shows the relationship between a security's market and its required rate of return. The return required for any security is equal to the risk-free rate plus the market risk premium multiplied by the security's beta