Which risk premium formula is used for a fully segmented market according to the Singer and Terhaar approach?

In a fully segmented market, the risk premium formula focuses on the relationship between the specific asset's risk and the overall market risk premium. The Singer and Terhaar approach identifies that the appropriate risk premium for an asset depends primarily on its own risk characteristics without incorporating any market correlation measures.

The formula denotes that the risk premium for asset 'i' (RPi) is directly proportional to the asset's standard deviation (σi) and the market risk premium relative to the overall market's standard deviation (RPM/σM). This captures how much additional return an investor would require for taking on the risk associated with asset 'i' compared to the market as a whole. In essence, it reflects the notion that riskier assets should provide higher expected returns, consistent with the assumptions underpinning the segmented market concept.

This formulation emphasizes idiosyncratic risk rather than systematic risk, which is why it does not incorporate correlation metrics. The correct application signifies the market's regard for individual asset volatility in determining the risk premium, aligning with the fundamental tenets of the Singer and Terhaar model.