All investors will hold the market portfolio, leveraging or deleveraging it with positions in the risk-free asset . CAPM divides the risk of holding risky assets into systematic and specific risk. Systematic risk is the risk of holding the market portfolio. As the market moves, each individual asset is more or less affected. To the extent that any asset is affected by such general market moves, that asset entails systematic risk.
Specific risk is the risk which is unique to an individual asset.
It represents the component of an asset's volatility which is uncorrelated with general market moves. According to CAPM, the marketplace compensates investors for taking systematic risk, but not for taking specific risk. This is because specific risk can be diversified away. When an investor holds the market portfolio, each individual asset in that portfolio entails specific risk, but through diversification, the investor's net exposure is just the systematic risk of the market portfolio. Systematic risk can be measured using beta .