The correct answer is: A. higher market risk.
Arbitrage pricing theory (APT) is a general equilibrium theory of asset pricing that asserts that the expected return of a security is determined by four factors: market risk, size, value, and liquidity.
Market risk is the risk that a security’s return will be affected by changes in the overall market. This risk is measured by the beta coefficient, which is a measure of the sensitivity of a security’s return to changes in the market return.
The higher the beta coefficient, the higher the market risk of the security and the higher the required rate of return. This is because investors demand a higher return to compensate them for the additional risk they are taking on.
The other three factors (size, value, and liquidity) also affect the expected return of a security, but they are not as important as market risk.
In conclusion, the higher the market risk of a security, the higher the required rate of return.