Forums
Back
Cost of capital
Financial Management
How do market imperfections lead to unsystematic risk?
Answers (1)
If investor estimates expected return of a Stock - on CAPM (i.e using Beta formula )as 12% - but if the actual return is only 5%. This might have happened because the prices of that stock were very volatile and it was not getting valued properly due to some specific industry issues or sentiment for that company or promoter corporate governance issues or some other such factor. CAPM captures only systematic risk/return i.e what can be explained by past variation of returns when compared with that of the market and not this unsystematic risk/return
Your Reply