Asked by Kianna Hendricks on Apr 27, 2024
Verified
Since the market return represents the expected return on an average stock,that return has a certain amount of risk.As a result,there exists a market risk premium,which is the amount over and above the risk-free rate,which is required to compensate stock investors for assuming an average amount of risk.
Market Risk Premium
An additional expected return that investors demand for choosing to invest in the stock market over a risk-free investment, reflecting the extra risk assumed.
Average Stock
The average price of a company's stock over a specific period, which can indicate the stock's general trend.
- Identify how market risk premiums are used to compensate investors for taking on additional risk.
Verified Answer
MA
Mohammad AlmarriMay 02, 2024
Final Answer :
True
Explanation :
This statement is true. The market return does have a certain amount of risk and therefore there exists a market risk premium to compensate investors for the risk they are taking on. The risk-free rate is the rate of return on an investment with no risk, typically the yield on a US Treasury bond.
Learning Objectives
- Identify how market risk premiums are used to compensate investors for taking on additional risk.