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 the above are true.

Question

Quizplus · Accepted Answer

In equilibrium, all risky securities should be priced according to their level of systematic risk, which is measured by the security's beta or marginal price of risk. The market portfolio, by definition, has a beta of 1 and represents the average level of systematic risk for all securities in the market. Therefore, the marginal price of risk for any individual security should be equal to the marginal price of risk for the market portfolio, in order to ensure that the security is priced correctly given its level of systematic risk.

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