CAPM question with answers rated A+ 2023 UPDATED

CAPM question with answers rated A+ 2023 UPDATEDWhat is 'total risk'? - correct answer systematic risk + unsystematic risk bare in mind: -Variance and standard deviation of returns are measures of total risk - with well-diversified risk, unsystematic risk is wiped out, so total risk = systematic risk Is there a reward for bearing risk? - correct answer Yes bruv, but not if you bare risk unnecessarily. The expected return on a risky asset depends only on asset's systematic risk, because you can diversify the unsystematic risk away. We measure systematic risk using beta, β What does β tell us? - correct answer β = 1 implies asset has same systematic risk as overall market β < 1 implies asset has less systematic risk than overall market β > 1 implies asset has more systematic risk than overall market Suppose there are two assets. Which is a better investment/ which has a higher risk-to-reward ratio? - correct answer Here's the numbers The answer is: - correct answer What happens if investors realise one asset has a higher risk-to-reward ratio? - correct answer Investors will buy the asset with a higher ratio and sell the asset with a lower one. The asset in higher demand will see a price rise, causing the expected return on that asset to fall. This investor action will only stop when the two assets have the same risk-to-reward ratio. Reward-to-risk ratio must be the same for all assets in an efficient market.