Asked by Zeyka Strandzheva on Apr 28, 2024
Verified
Which of the following is the best definition of market risk premium?
A) Percentage of a portfolio's total value in a particular asset.
B) Group of assets such as stocks and bonds held by an investor.
C) The difference between the return on a risky investment and a risk-free investment
D) Return on a risky asset expected in the future.
E) Equation of the SML showing the relationship between expected return and beta.
Market Risk Premium
The extra return over the risk-free rate that investors require to compensate them for the risk of investing in the stock market.
Risky Investment
An investment that carries a high level of risk of loss, along with the potential for significant returns.
Risk-free Investment
An investment which is thought to have no risk of financial loss, though in reality, such an investment is virtually nonexistent.
- Learn the definitions and mathematical procedures for crucial investment metrics like beta, standard deviation, risk premium, and expected returns.
Verified Answer
ZK
Zybrea KnightMay 04, 2024
Final Answer :
C
Explanation :
The market risk premium is defined as the difference between the expected return on a market portfolio of investments (risky investment) and the risk-free rate of return. It represents the extra return investors expect to earn for choosing to invest in a risky asset rather than a risk-free asset.
Learning Objectives
- Learn the definitions and mathematical procedures for crucial investment metrics like beta, standard deviation, risk premium, and expected returns.