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It is important to understand that business-specific (unsystematic) risk is not included in the capital asset pricing model, because beta measures only market (systematic) risk.
It is important to understand that business-specific (unsystematic) risk is not included in the capital asset pricing model, because beta measures only market (systematic) risk. The underlying assumption is that: a. we don't need to worry about business-specific risk in portfolios because it's diversified away. b. we can't measure business-specific risk so it's useless to worry about it. c. business-specific risk is usually small compared with market risk. d. All of the above
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