Securities Trader Representative (Series 57) Practice Exam

The Capital Asset Pricing Model (CAPM) specifically addresses systematic risk, which is the type of risk that affects the entire market or a significant portion of it. Systematic risk is linked to factors such as economic changes, political events, or natural disasters that can impact all securities to varying degrees. The CAPM quantifies this risk through the beta coefficient, which measures the sensitivity of an asset’s returns relative to the returns of the overall market. This allows investors to understand how much systematic risk they are taking on when investing in a particular asset compared to the market as a whole.

In contrast, unsystematic risk refers to risks that are unique to a specific company or industry, such as management decisions or operational issues. The CAPM does not specifically address this type of risk, as it can typically be mitigated through diversification. Other forms of risk, such as credit risk and operational risk, also fall outside the scope of the CAPM, which is focused on the relationship between expected return and systematic risk. Therefore, systematic risk is the core concept that CAPM aims to quantify and analyze for investors.