The risk premium for an individual security is computed by
A)adding the risk-free rate to the security's expected return.
B)multiplying the security's beta by the market risk premium.
C)multiplying the security's beta by the risk-free rate of return.
D)dividing the market risk premium by the beta of the security.
E)dividing the market risk premium by the quantity (1 − Beta).

Question

Quizplus · Accepted Answer

The risk premium for an individual security is computed by multiplying the security's beta (which measures the security's volatility or risk relative to the market) by the market risk premium (the difference between the expected return on the market and the risk-free rate of return). This calculation reflects the additional return expected from holding a riskier asset over a risk-free asset.

The Risk Premium for an Individual Security Is Computed by