The risk premium for an individual security is computed by:
A) Multiplying the security's beta by the market risk premium.
B) Multiplying the security's beta by the risk-free rate of return.
C) Adding the risk-free rate to the security's expected return.
D) Dividing the market risk premium by the quantity (1 - beta).
E) Dividing the market risk premium by the beta of the security.

Question

Quizplus · Accepted Answer

The risk premium for an individual security is computed by multiplying the security's beta by the market risk premium. This calculation is part of the Capital Asset Pricing Model (CAPM), which is used to determine a theoretically appropriate required rate of return of an asset, considering its risk relative to the market.

The Risk Premium for an Individual Security Is Computed By