According to the Capital Asset Pricing Model (CAPM), the

Solution

• The CAPM is a cornerstone of modern portfolio theory. It makes a crucial distinction:
• Total Risk  (measured by variance or standard deviation) includes both systematic and unsystematic risk.
• Unsystematic (Firm-specific) Risk:  Risk unique to a company (e.g., management quality, product failure). This risk can be  diversified away  by holding a large portfolio.
• Systematic (Market) Risk:  Risk that affects the entire market (e.g., interest rate changes, recessions, wars). It  cannot be diversified away .
  CAPM posits that in an efficient market, investors are only rewarded for bearing  non-diversifiable systematic risk . This risk is measured by  Beta ( β ) , which quantifies a security's sensitivity to movements in the overall market.