Using the Capital Asset Pricing Model (CAPM), a decrease in the risk premium will increase the expected rate of return on an individual security. Assume that the security's beta, the risk-free rate of return, and the market rate of return are all positive.

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According to the Capital Asset Pricing Model (CAPM), the expected rate of return on an individual security is determined by the risk-free rate plus the product of the security's beta and the market risk premium (difference between the market rate of return and the risk-free rate). A decrease in the risk premium (market rate of return - risk-free rate) would decrease, not increase, the expected rate of return on an individual security, assuming the security's beta, the risk-free rate, and the market rate of return remain positive.

Using the Capital Asset Pricing Model (CAPM), a Decrease in the Risk