In Terms of the Risk/return Relationship in the APT

question 20

Multiple Choice

In terms of the risk/return relationship in the APT,

• A)only factor risk commands a risk premium in market equilibrium.
• B)only systematic risk is related to expected returns.
• C)only nonsystematic risk is related to expected returns.
• D)only factor risk commands a risk premium in market equilibrium, and only systematic risk is related to expected returns.

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Definitions:

Corporate Profit

The financial surplus gained by a corporation after deducting all costs, taxes, and expenses from revenue.

Physical Capital

The stock of tangible goods like machinery, buildings, and infrastructure that are used in production.

Human Capital

Represents the skills, knowledge, and experience possessed by an individual or population, viewed in terms of their value or cost to an organization or country.

Financial Capital

The funds provided by lenders (and investors) to businesses to purchase real capital equipment for producing goods/services.