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

Question

Quizplus · Accepted Answer

The capital asset pricing model takes into consideration the nondiversifiable risk or systematic risk of the firm, which is the risk that cannot be eliminated through diversification, and is compensated for by investors through the required return on their investment in the form of cost of common stock equity. The specific risk of the firm or diversifiable risk can be reduced through diversification and is not a part of the calculation of cost of common stock equity. The model does not directly consider price volatility of the stock, but rather the risk that affects the entire market.

Using the Capital Asset Pricing Model, the Cost of Common