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. E) only factor risk commands a risk premium in market equilibrium, and only nonsystematic risk is related to expected returns.

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Nonfactor risk may be diversified away; thus, only factor risk commands a risk premium in market equilibrium. Nonsystematic risk across firms cancels out in well-diversified portfolios; thus, only systematic risk is related to expected returns.

In Terms of the Risk/return Relationship in the APT