Using the Capital Asset Pricing Model (CAPM), the cost of common stock equity is the return required by investors as compensation for the firm's nondiversifiable risk.

Question

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The statement correctly describes the CAPM, which is a widely used financial model for calculating the expected return on an investment, based on the risk-free rate, market risk premium, and beta of the asset. The cost of common stock equity, or the required rate of return, is typically derived from the CAPM by adding the risk premium for the stock to the risk-free rate. The nondiversifiable risk in this context refers to the risk of the stock relative to the market as a whole, which cannot be eliminated through diversification.

Using the Capital Asset Pricing Model (CAPM), the Cost of Common