The risk premium for an individual security is equal to the ____.
A) beta times the market return
B) difference between the required return and the risk-free rate
C) weighted average of the individual security betas in a portfolio
D) security's covariance divided by the variance of the market

Question

Quizplus · Accepted Answer

The risk premium for an individual security is the extra return an investor expects to receive for taking on additional risk. It is calculated as the difference between the required return (the return investors demand for holding the security) and the risk-free rate (the return on a risk-free security). Therefore, B is the correct choice. A is incorrect because it calculates the expected return, not the risk premium. C is incorrect because it is describing the beta of a portfolio, not a single security. D is incorrect because it is calculating the beta of a security, not the risk premium.

The Risk Premium for an Individual Security Is Equal to the ____