According to the CAPM, the risk premium an investor expects to receive on any stock or portfolio is ________.
A) directly related to the risk aversion of the particular investor
B) inversely related to the risk aversion of the particular investor
C) directly related to the beta of the stock
D) inversely related to the alpha of the stock

Question

Quizplus · Accepted Answer

According to CAPM, the risk premium is directly related to the beta of the stock. Beta measures the systematic risk of the stock, which is the risk that affects the entire market. The higher the beta of a stock, the higher the risk premium that investors expect to receive as compensation for taking on the additional risk. Choice A and B are incorrect because risk aversion is not directly related to the expected risk premium in the CAPM. Choice D is incorrect because alpha is not a measure of systematic risk and, therefore, is not used in the CAPM to determine the expected risk premium.

According to the CAPM, the Risk Premium an Investor Expects