Asked by Carrisa Green on Jul 15, 2024
Verified
The risk-free rate of return subtracted from the expected market rate of return is called the:
A) Expected rate of return.
B) Real rate of expected return.
C) Risk premium.
D) Unexpected rate of return.
E) Unsystematic rate of risk.
Risk-Free Rate
The rate of return on an investment with no risk of financial loss, often represented by the yield on government Treasury bills.
Expected Market Rate
The forecasted rate of return anticipated by investors in the financial markets, based on current conditions and future projections.
Risk Premium
The extra return above the risk-free rate that investors require to hold a risky investment.
- Explain and determine the market risk premium, highlighting its relevance in investment decision-making.
Verified Answer
OM
Orlando MartinezJul 16, 2024
Final Answer :
C
Explanation :
The risk-free rate of return subtracted from the expected market rate of return gives the risk premium. This represents the extra return investors expect to earn for taking on additional risk compared to a risk-free investment.
Learning Objectives
- Explain and determine the market risk premium, highlighting its relevance in investment decision-making.