This model assumes that a firm's stockholders are diversified, but if they are diversified, then the firm's true investment risk would not be measured by and the capm estimate would the correct value of rs.
The name of the model is CAPM MODEL. CAPM stands for Capital Asset Pricing Model. In the finance field, the model is used to determine a theoretically required rate of return of an asset. This model is usually used to make decisions about adding assets to a well diversified portfolio.
