In terms of the risk/return relationship in the APT,
A)only factor risk commands a risk premium in market equilibrium.
B)only systematic risk is related to expected returns.
C)only nonsystematic risk is related to expected returns.
D)only factor risk commands a risk premium in market equilibrium, and only systematic risk is related to expected returns.

Question

Quizplus · Accepted Answer

In the APT framework, only factor risk (systematic risk) commands a risk premium in market equilibrium, and only this type of risk is related to expected returns. Nonsystematic risk can be diversified away and therefore does not affect expected returns.

In Terms of the Risk/return Relationship in the APT