The risk premium increases as the non-diversiﬁable risk increases.

Question

Quizplus · Accepted Answer

This is true because investors demand a higher return to compensate for the additional risk they are taking on that cannot be diversified away. Non-diversifiable risk, also known as systematic risk, affects all securities in the market and cannot be eliminated through diversification, unlike diversifiable risk, which affects individual securities and can be eliminated through diversification.

The Risk Premium Increases as the Non-Diversiﬁable Risk Increases