The Capital Asset Pricing Model

Running Head : INSERT ABBREVIATED TITLE 1 . For each of the scenarios below , explain whether or not it represents a diversifiable or a non diversifiable risk . consider the issues from the viewpoint of investors . Explain your reasoning

a . A large fire severely damages three major U .S . cities

This is a non diversifiable risk . This means that one cannot mitigate this risk cannot be avoided by not buying some particular stock . It would affect the entire market , therefore , whatever the composition of the stock may be it is going to impact the market and

consequently the worth of investor 's portfolio

b . A substantial unexpected rise in the price of oil

The prominence of oil prices and its impact over entire market can neither be denied historically nor theoretically . Therefore , the increase in oil prices also affect across the board . Therefore , this event can lead to a non diversifiable risk

c . A major lawsuit is d against one large publicly traded corporation

This is a risk that is associated with a particular company and it can easily be avoided by not including the stocks of that company in the portfolio . Therefore , it is a diversifiable risk that the investor can avoid by efficiently determining the composition of its portfolio

2 . Use the CAPM to answer the following questions

a . Find the Expected Rate of Return on the Market Portfolio given that the Expected Rate of Return on Asset "i " is 10 , the Risk-Free Rate is 3 , and the Beta (b...