According to the Capital Asset Pricing Model a stock's risk premium is:
A)a price premium on low risk stocks that investors are willing to pay for safety.
B)the risk premium on an average stock factored by a measure of the stock's market risk.
C)the risk premium on an average stock factored by a measure of the stock's total risk.
D)extra money paid for high risk stocks because they usually have high returns.

Question

Quizplus · Accepted Answer

According to the Capital Asset Pricing Model, a stock's risk premium is the additional return an investor expects to receive for taking on the additional risk of investing in that stock, relative to the risk of investing in a risk-free asset. This additional return is based on the stock's "beta," which measures the stock's market risk or sensitivity to market movements. Therefore, option B is correct, as it reflects the risk premium on an average stock factored by a measure of the stock's market risk. Option A is incorrect, as the risk premium is not a price premium on low risk stocks, but rather an additional return on higher risk stocks. Option C is partially correct but not complete, as the risk premium is not just based on the stock's total risk, but on its market risk specifically. Option D is also incorrect, as the risk premium is not just extra money paid for high risk stocks, but rather the additional return expected for taking on that additional risk.

According to the Capital Asset Pricing Model a Stock's Risk