The amount of compensation an investor should expect for accepting unsystematic risk:
A)is $0
B)is equal to the market risk premium
C)is equal to beta multiplied by the market rate of return
D)varies indirectly with the beta of the firm
E)is equal to the beta of the firm multiplied by the market risk premium

Question

Quizplus · Accepted Answer

Unsystematic risk is company-specific and can be diversified away by holding a diversified portfolio. As such, investors should not expect any additional compensation for accepting unsystematic risk beyond the expected return of a fully diversified portfolio. Therefore, the amount of compensation for unsystematic risk is zero.

The Amount of Compensation an Investor Should Expect for Accepting