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Which one of the following should earn the most risk premium based on CAPM? a. diversified portfolio with returns similar to the overall market b.

Which one of the following should earn the most risk premium based on CAPM?

a. diversified portfolio with returns similar to the overall market b. stock with a beta of 1.38 c. stock with a beta of 0.74 d. U.S. Treasury bill e. portfolio with a beta of 1.01

I know the answer is B. But I don't know why.

According to the formula, Risk premium = SML Slope = E (Rm) - Rf. It has nothing to do with beta.

Why is the answer B?

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