What is the risk premium formula for markets with complete integration?

In a market with complete integration, the risk premium can be understood through the relationship between an asset's risk and its expected return in relation to the overall market. The correct formula in this scenario involves the standard deviation of the asset, the correlation of the asset with the market, and the market's Sharpe ratio.

The significance of the standard deviation is that it represents the total risk of the asset, while the correlation indicates how closely the asset moves with the market. The market Sharpe ratio, which is the excess return per unit of risk (measured by standard deviation), provides an indication of how much return an investor can expect to receive for taking on additional risk compared to the risk-free rate.

Thus, when you multiply the standard deviation of the asset by its correlation to the market and the market's Sharpe ratio, you effectively quantify the risk premium that an investor should expect from the asset considering its inherent risk relative to the overall market performance. This reflects the asset's expected compensation for the risk taken in an integrated market context.

The other options do not capture the nuances of risk as comprehensively. For example, just taking the market return minus the risk-free rate pertains to the total market risk premium without connecting it to individual asset risks.