Answer: Directly with beta.

## Explanation According to the Capital Asset Pricing Model (CAPM), the expected risk premium for a stock is calculated as: **E(Ri) - Rf = βi × (E(Rm) - Rf)** Where: - E(Ri) - Rf = Risk premium for stock i - βi = Beta coefficient for stock i - E(Rm) - Rf = Market risk premium From this formula, we can see that: - The risk premium is **directly proportional** to beta (β) - As beta increases, the risk premium increases proportionally - As beta decreases, the risk premium decreases proportionally Beta measures systematic risk, which is the risk that cannot be diversified away. Therefore, the risk premium increases directly with beta, not inversely. **Correct Answer: A** - Directly with beta

Author: Tanishq Prabhu