According to the SML, the risk premium for stock X depends on:
A)everything about Company X.
B)Company X's earnings only.
C)only X's market risk.
D)X's total risk as reflected by its beta.

Question

Quizplus · Accepted Answer

DThe Security Market Line (SML) is a concept from the Capital Asset Pricing Model (CAPM) that defines the expected return of an investment as a function of its systematic risk, as measured by beta. Choices C and D are correct because the SML specifically relates a stock's risk premium to its market risk (systematic risk) and not to its total risk or specific company characteristics. Beta reflects the stock's volatility in relation to the overall market, representing the type of risk that cannot be diversified away.

According to the SML, the Risk Premium for Stock X