Asked by Gurpreet Verka on Jul 18, 2024
Verified
The excess return earned by an asset that has a beta of 1.0 over that earned by a risk-free asset is referred to as the:
A) Market rate of return.
B) Market risk premium.
C) Systematic return.
D) Total return.
E) Real rate of return.
Market Risk Premium
The excess return that investors require for choosing a risky investment over a risk-free one.
Excess Return
The return on an investment that exceeds the return on a risk-free asset such as a Treasury bond.
Risk-Free Asset
A secure financial asset offering a promised payoff without any chance of losing money, commonly found in the form of government bonds.
- Describe and compute the market risk premium, elucidating its importance in making investment choices.
Verified Answer
KS
Kamaljit singh KhosaJul 25, 2024
Final Answer :
B
Explanation :
The market risk premium is the excess return that investing in the stock market provides over a risk-free rate. This is the additional return expected from holding a risky market portfolio instead of risk-free assets. An asset with a beta of 1.0 is expected to move with the market, and thus its excess return over the risk-free rate is indeed the market risk premium.
Learning Objectives
- Describe and compute the market risk premium, elucidating its importance in making investment choices.