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1212The equation for the capital asset pricing model is:
Beta measures the sensitivity of the stock's returns to changes in the returns on the market portfolio and is a standardized measure of the stock's systematic or non-diversifiable risk. As indicated by the CAPM equation, the expected return for any stock is related to its beta. In contrast, unsystematic risk does not affect the CAPM expected return. Therefore, according to the CAPM, expected returns are identical for assets with identical betas. Stock X has identical systematic risk but greater unsystematic risk than Stock Y, resulting in greater total risk (standard deviation).