The risk premium for an individual security is computed by:
A)multiplying the security's beta by the market risk premium.
B)multiplying the security's beta by the risk-free rate of return.
C)adding the risk-free rate to the security's expected return.
D)dividing the market risk premium by the quantity (1 + β).
E)dividing the market risk premium by the beta of the security.

Question

Quizplus · Accepted Answer

The risk premium for an individual security is calculated by multiplying the security's beta (β) by the market risk premium. This is based on the Capital Asset Pricing Model (CAPM), which describes the relationship between systematic risk and expected return for assets, particularly stocks.

The Risk Premium for an Individual Security Is Computed By