To determine the risk premium associated with an asset's expected return,two components of the return are usually cited,only the first,the covariance of the asset's return with the market portfolio,is used,because ________.

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The risk premium associated with an asset's expected return considers the asset's covariance with the market portfolio because this reflects the non-diversifiable risk, also known as systematic or market risk. The second component of an asset's return, which can be attributed to factors specific to the asset itself (idiosyncratic risk), is considered diversifiable through portfolio diversification. Therefore, only the non-diversifiable risk is compensated in the form of a risk premium.

To Determine the Risk Premium Associated with an Asset's Expected