Using the capital asset pricing model, the cost of common stock equity is the return required by investors as compensation for ________.
A) the specific risk of a firm
B) a firm's unsystematic risk
C) price volatility of the stock
D) a firm's nondiversifiable risk

Question

Quizplus · Accepted Answer

The capital asset pricing model (CAPM) is used to determine the expected return on an investment based on the risk-free rate, the market risk premium, and the systematic risk (also known as nondiversifiable risk) associated with the investment. Therefore, the cost of common stock equity is the return required by investors as compensation for a firm's nondiversifiable risk. Answers A, B, and C refer to firm-specific factors that are not considered in the CAPM.

Using the Capital Asset Pricing Model, the Cost of Common