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

Question

Quizplus · Accepted Answer

The capital asset pricing model (CAPM) is used to calculate the cost of common stock equity, which is the return required by investors to compensate for the nondiversifiable risk of the firm. Nondiversifiable risk refers to the risk that cannot be eliminated through diversification, such as market risk or systematic risk. Therefore, the correct choice is D, the firm's nondiversifiable risk.

Using the Capital Asset Pricing Model, the Cost of Common