The correct option is option b, risk
premium.
The risk free rate is a rate of return that can be
obtained without taking on any risk. This is usually the rate of return of interest
bearing securities like bonds issued by the government. The interest earned on these is
assured as the government can, if required, print extra money to honor its debt. It is
common for all securities.
Rates of expected inflation are
applicable to and common for all href="http://www.investorwords.com/4446/security.html">securities.
Inflation deflates the returns earned from all securities to the same
extent.
The nominal interest rate is usually taken as the
rate of interest which an investor can get by buying government risk-free bonds without
adjusting the returns for inflation. This is also common for all
securities.
The risk premium is the extra returns that are
sought by investors for buying securities which do not have a certain rate of return.
This could include interest bearing instruments issued by companies where there is a
possibility of defaul or stock which can change in price based on numerous factors, some
of which are profits made by the company, future growth prospects, liquidity,
etc.