the correct insight underlying the CAPM: The only risk that investors should be compensated for bearing is the risk that cannot be diversified away. Only systematic risk will command a risk premium. But the systematic elements of risk in particular stocks and portfolios may be too complicated to be captured by beta—the tendency of the stocks to move more or less than the market. This is especially so because any particular stock index is an imperfect representative of the general market. Hence, beta may fail to capture a number of important systematic elements of risk.
