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

Question

Quizplus · Accepted Answer

The capital asset pricing model takes into consideration the nondiversifiable risk of the firm, also known as systematic risk, which is the risk that cannot be eliminated through diversification. The cost of ordinary stock equity is the return required by investors for taking on this type of risk. Therefore, the best choice is D - the firm's nondiversifiable risk.

Using the Capital Asset Pricing Model, the Cost of Ordinary