If the rate of return on the stock market is r_m and the rate of return on a risk-free asset is r_f, then:

Question

Quizplus · Accepted Answer

The difference between the rate of return on the stock market and the risk-free rate of return represents the additional return an investor can earn by taking on the risk of investing in the stock market. This risk includes both diversifiable (company-specific) and non-diversifiable (market-wide) components, but since the question specifies "all of it nondiversifiable," we can conclude that the difference in returns measures the non-diversifiable risk an investor must accept in order to earn the higher return from the stock market.

If the Rate of Return on the Stock Market Is