Asked by Spencer Baker on Jun 30, 2024
Verified
A risk premium is
A) the difference between the earnings of a low risk asset and a high risk asset
B) premium paid to a security holder to compensate him for bearing a higher risk
C) both A&B
D) none of the above
Risk Premium
Higher expected rates of return that compensate investors in risky assets. In equilibrium, differences in the rate of return reflect differences in the riskiness of an investment.
Low Risk Asset
An investment that is generally expected to yield returns with relatively lower volatility or risk of loss.
High Risk Asset
An investment with a high potential for significant loss but also the potential for substantial rewards.
- Apprehend the dynamics of selecting investments when faced with uncertainty and the criticality of risk premiums.
Verified Answer
ZK
Zybrea KnightJul 03, 2024
Final Answer :
C
Explanation :
A risk premium is the difference between the expected return on an investment and the risk-free rate of return. It is the compensation that investors demand for taking on riskier investments compared to a risk-free investment like a government bond. So, option A is partially correct as it talks about the difference in earnings of low-risk and high-risk assets. Option B is also correct as it describes the risk premium as compensation for bearing higher risk. Hence, the correct answer is C.
Learning Objectives
- Apprehend the dynamics of selecting investments when faced with uncertainty and the criticality of risk premiums.