You own three securities. Security A has an expected return of 11% as compared to 14% for Security B and 9% for Security C. The expected inflation rate is 4% and the nominal risk-free rate is 5%. Which one of the following statements is correct?
A)There is no risk premium on Security C.
B)The risk premium on Security A exceeds that of Security B.
C)Security B has a risk premium that is 50% greater than Security A's risk premium.
D)The risk premium on Security C is 5%.
E)All three securities have the same expected risk premium.

Question

Quizplus · Accepted Answer

The risk premium is calculated as the expected return minus the nominal risk-free rate. Security A's risk premium is 6% (11% - 5%), and Security B's risk premium is 9% (14% - 5%). Security B's risk premium is 50% greater than Security A's risk premium (9% is 50% more than 6%).

You Own Three Securities