Question

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.

Answer 1

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.