The required return on any security consists of a risk-free rate of return plus a premium for
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The required return on any security consists of a risk-free rate of return plus a premium for the risk of that security.
a. The risk-free rate varies over time and is influenced by the expected rate of inflation and the supply and demand of funds in the overall economy.
b. The risk premium on a specific security is influenced by the business risk of the firm, the financial risk of the firm, the marketability risk of the security, and the time to maturity of the security. LO1
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