The risk premium of a stock is NOT affected by its ________.

Question

BlackTom AI · Accepted Answer

The question asks which factor does NOT affect the risk premium of a stock. We will evaluate each option in turn.
Option 1: 'undiversifiable risk' — This is synonymous with systematic risk or market risk. Since risk premia for stocks generally reflect non-diversifiable risk, this factor does influence the required return when evaluating a portfolio that cannot eliminate this risk through diversification.
Option 2: 'market risk' — Market risk is a core component of systematic risk. It cannot be fully diversified away and therefore does impact the risk premium investors demand for bearing the stock’s risk in aggregate markets.
Option 3: 'systematic risk' — Systematic risk is precisely the non-diversifiable portion of risk that affects all assets to some degree. Because investors require compensation for bearing this risk, it directly affects the risk premium.
Option 4: 'unsystematic risk' — Unsystematic, or idiosyncratic, risk is diversifiable. In a well-diversified portfolio, this risk can be largely eliminated, so it does not require a premium in the same way systematic risk does. Therefore, it does not affect the stock’s risk premium in theory.
In summary, the statements about undiversifiable risk, market risk, and systematic risk each describe factors that influence the risk premium, while unsystematic risk does not, due to diversification effects.

The risk premium of a stock is NOT affected by its ________.

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