To determine the risk premium associated with an asset’s expected retu

To determine the risk premium associated with an asset’s expected return, two components of the return are usually cited, only the first, the covariance of the asset’s return with the market portfolio, is used, because ________.

A) the risk associated with the asset depends on the market risk
B) it is the only part of the asset’s expected return that has risk
C) the risk of the second component can be diversified away
D) the market risk is the most difficult to calculate

ANSWER

Answer: C