The risk premium for an individual security is equal to the:
A)beta times the market return.
B)difference between the market return and the risk free rate times the security's beta.
C)weighted average of the individual security betas in a portfolio.
D)the security's variance divided by the variance of the market.

Question

Quizplus · Accepted Answer

The risk premium for an individual security is the additional return investors require to compensate for the additional risk they are taking on by investing in that security. The risk premium is calculated as the difference between the market return and the risk-free rate, both adjusted for the security's beta (a measure of its volatility relative to the market). Therefore, choice B, which is the difference between the market return and the risk-free rate times the security's beta, is the correct answer.

The Risk Premium for an Individual Security Is Equal to The