Question

N calculating the cost of common stock equity, the model which describes the relationship between the required return and the nondiversifiable risk of the firm is ________.

Answer 1

the model which describes the relationship between the required return and the nondiversifiable risk of the firm would be: The capital asset pricing model

The capital asset pricing model is a financial model that is used to determine the relation between risk and expected result.
In this model, we need to compared these following factors:
- Risk free rate
- Beta of the security
- expected market return