Asked by Dayna McCormick on Jul 22, 2024
Verified
The risk premium for an individual security is computed by:
A) Multiplying the security's beta by the market risk premium.
B) Multiplying the security's beta by the risk-free rate of return.
C) Adding the risk-free rate to the security's expected return.
D) Dividing the market risk premium by the quantity (1 - beta) .
E) Dividing the market risk premium by the beta of the security.
Security's Beta
A measure of an investment's volatility compared to the market as a whole, indicating its risk in relation to the market.
Risk Premium
The extra return expected from an investment for taking on additional risk.
- Gain insight into the interplay between risks and forecasted returns in investment scenarios.
Verified Answer
NB
Nadia BennettJul 23, 2024
Final Answer :
A
Explanation :
The risk premium for an individual security is computed by multiplying the security's beta by the market risk premium. This calculation is part of the Capital Asset Pricing Model (CAPM), which is used to determine a theoretically appropriate required rate of return of an asset, considering its risk relative to the market.
Learning Objectives
- Gain insight into the interplay between risks and forecasted returns in investment scenarios.