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      Question

      Which risk is specifically captured by adding a "Risk

      Premium" to the risk-free rate in the CAPM formula? 
      A Diversifiable risk Correct Answer Incorrect Answer
      B Systematic risk (Market risk) Correct Answer Incorrect Answer
      C Liquidity risk Correct Answer Incorrect Answer
      D Management risk Correct Answer Incorrect Answer
      E Operational risk Correct Answer Incorrect Answer

      Solution

      CAPM assumes investors hold diversified portfolios, so they are only compensated for non-diversifiable, systematic risk, represented by Beta.

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