In equilibrium,the marginal price of risk for a risky security must be
A) equal to the marginal price of risk for the market portfolio.
B) greater than the marginal price of risk for the market portfolio.
C) less than the marginal price of risk for the market portfolio.
D) adjusted by its degree of nonsystematic risk.
E) none of these are true.

Question

Quizplus · Accepted Answer

In equilibrium, the capital asset pricing model (CAPM) suggests that the marginal price of risk for a risky security should be proportional to the market risk premium and the beta of the security relative to the market portfolio. Since the market portfolio has a beta of 1, the marginal price of risk for the market is equal to the market risk premium. Therefore, the marginal price of risk for a risky security must also be equal to the marginal price of risk for the market portfolio to be in equilibrium, according to the CAPM.

In Equilibrium,the Marginal Price of Risk for a Risky Security