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 risk-free rate of return.
C)multiplying the security's beta by the market risk premium.
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 by the market risk premium. Beta is a measure of the systematic risk of a security, and the market risk premium is the excess return that investors demand for taking on the risk of investing in the overall market. Therefore, multiplying the two gives the expected excess return for an individual security given its level of systematic risk.

The Risk Premium for an Individual Security Is Computed By