In the extended Labor CAPM, the CAPM measure of systematic risk, beta, is replaced by an adjusted beta that also accounts for covariance with the portfolio of aggregate human capital. Despite the complications inherent in any extension of the CAPM with a labor component, labor is an important consideration in explaining the systematic risk of financial securities.
a. True
b. False

Question

26-03-2021
Business

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In the extended Labor CAPM, the CAPM measure of systematic risk, beta, is replaced by an adjusted beta that also accounts for covariance with the portfolio of aggregate human capital. Despite the complications inherent in any extension of the CAPM with a labor component, labor is an important consideration in explaining the systematic risk of financial securities.
a. True
b. False

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anthougo anthougo · Answer 1 · 2021-03-29T17:05:55+02:00

Answer:

Despite the complications inherent in any extension of the CAPM with a labor component, labor is an important consideration in explaining the systematic risk of financial securities.

b. False

Explanation:

Instead of being an important component of the systematic risk, labor is a component of the unsystematic risk of a financial security or investment. Therefore, the risk arising from the labor component is a type of unsystematic risk. Unsystematic risks are peculiar to a firm or an industry. They are internal to the business environment of a firm or an industry. Systematic risks are market-driven risks. These latter risks include market, interest rate, and purchasing power (inflation) risks.