Which of the following is true?

Question

Quizplus · Accepted Answer

The equilibrium return on a stock should be based on the risk-free return (the return on a risk-free asset, such as a U.S. Treasury bond), and a premium for the market risk (as measured by the expected return on the overall market) and a premium for the firm-specific risk (as measured by the beta coefficient of the stock). This is known as the capital asset pricing model (CAPM). Option A is incorrect as the equilibrium return is not based solely on the risk premium, but also on other factors as explained. Option B is incorrect as the equilibrium return is not based on only firm-specific risk, but also market risk. Option D is not directly related to the concept of equilibrium return and is therefore incorrect.

Which of the Following Is True