Question

According to CAPM, the amount of reward an investor receives for bearing the risk of an individual security depends upon the:_____.

a. beta of the security and the market rate of return.b. risk free rate, the market rate of return, and the standard deviation of the security.c. market risk premium and the amount of systematic risk inherent in the security.d. standard deviation of the security and the risk-free rate of return.e. amount of total risk assumed and the market risk premium.

Answer 1

The reward an investor receives according to CAPM depends on the market risk premium and the amount of systematic risk inherent in the security, represented by the security's beta.

Step-by-step explanation:

According to the Capital Asset Pricing Model (CAPM), the amount of reward an investor receives for bearing the risk of an individual security depends upon the market risk premium and the amount of systematic risk inherent in the security, which is represented by the security's beta. Therefore, the correct answer to the question is:

c. market risk premium and the amount of systematic risk inherent in the security.

The expected rate of return on a security in CAPM is calculated using the risk-free rate of return, the expected market return, and the security's beta. The formula is: Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate), where the (Market Return - Risk-Free Rate) is known as the market risk premium, and Beta represents the security's systematic risk relative to the overall market.