Systematic Risk
According to the Capital Asset Pricing Model (CAPM), the expected return of a security is determined by:
CAPM: Expected Return = Rf + Beta(Rm - Rf). Only systematic risk matters.
Complete Analysis & Legal Rationale
CAPM calculates expected return as: Risk-free rate + Beta x (Market return - Risk-free rate). It uses systematic risk (beta) only, assuming unsystematic risk can be diversified away.
Distractor Autopsy (Why Other Options Are Traps)
FINRA exam writers design incorrect distractors using specific calculation mistakes and regulatory misconceptions. Review why each option succeeds or fails:
CAPM uses only systematic risk (beta), not total risk.
Matches the verified teaching point in the explanation.
CAPM is forward-looking, not based solely on historical data.
Dividend yield is not a component of the CAPM formula.
Official Standard: Outline-level citation: item maps to Series 7 topic coverage. Prefer a specific FINRA/SEC/MSRB rule citation in a later author pass.