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 options are true.

Question

Quizplus · Accepted Answer

In equilibrium, according to the Capital Asset Pricing Model (CAPM), the marginal price of risk for any risky security must be equal to the marginal price of risk for the market portfolio. This is because investors are compensated for the risk they take that cannot be diversified away (systematic risk), which is the same across the market.

In Equilibrium, the Marginal Price of Risk for a Risky