You have learned the use of Normal Risk Premium (or Normal Market Premium) that is presented as “(Rm - Rf)” in the CAPM. Which one of the following describes it (Normal Market Premium or Normal Risk Premium) most appropriately?

1) It represents the expected rate of return on the equity investment made into a company by the stockholders.

2) It stands for the level of risk perceived by equity investors when they choose to invest into a specific business firm.

3) It stands for the additional rate of return expected by the investors, above a risk-free rate, when they choose the stock market for their investment.

4) All of the above

5) 1) & 3) only