Which formula represents the risk premium for complete segmentation?

The correct choice for representing the risk premium for complete segmentation is based on the Sharpe ratio of the market and the standard deviation of the asset class. In the context of complete segmentation, the market operates under conditions where different asset classes do not hedge against each other, leading to a potential difference in risk and return profiles.

The formula involves the standard deviation of the asset class because it reflects the risk associated with investing in that particular asset class. The Sharpe ratio of the market, which is the excess return per unit of risk taken, indicates how much return an investor can expect to receive for assuming additional risk relative to the market. By multiplying the standard deviation of the asset class by the Sharpe ratio of the market, you effectively calculate the risk premium that an investor could anticipate from investing in that particular asset class in a segmented market.

This reflects a key principle in finance where the risk premium associated with an investment should correspond to the inherent risk of that investment relative to the overall market dynamics. The formula explicitly integrates these elements, making it relevant in evaluating expected economic returns in a segmented market scenario.