In equilibrium, the marginal price of risk for a risky security must be

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In equilibrium, the marginal price of risk for a risky security must be equal to the marginal price of risk for the market portfolio. This is known as the Capital Asset Pricing Model (CAPM) and assumes that investors are rational and risk-averse, meaning they require extra compensation (in the form of higher expected returns) for taking on extra risk. The expected return for a risky security is determined by its beta (systematic risk) and the expected return on the market portfolio, while the marginal price of risk reflects the additional return required for each unit of risk. Therefore, the equilibrium condition is that the marginal price of risk for a risky security (i.e. the slope of its Security Market Line) must equal the marginal price of risk for the market portfolio (i.e. the return on the market minus the risk-free rate, divided by the market's standard deviation).

In Equilibrium, the Marginal Price of Risk for a Risky