The risk-free rate is 3.0%. What is the expected risk premium on this security given the following information?
$\begin{array}{lcr}
\text { State of the Economy } & \text { Probability } & E(R) \
\text { Boom } & .30 & 16\% \
\text { Normal } & .50 & 8\% \
\text { Recession } & .20 & -12\%
\end{array}$

A)2.90%
B)3.01%
C)3.40%
D)3.80%
E)4.15%

Question

The risk-free rate is 3.0%. What is the expected risk premium on this security given the following information?
$\begin{array}{lcr}
\text { State of the Economy } & \text { Probability } & E(R) \
\text { Boom } & .30 & 16\% \
\text { Normal } & .50 & 8\% \
\text { Recession } & .20 & -12\%
\end{array}$

A)2.90%
B)3.01%
C)3.40%
D)3.80%
E)4.15%

Quizplus · Accepted Answer

The expected risk premium can be calculated by subtracting the risk-free rate from the expected return. The question doesn't provide us with the expected return, but we can estimate it using the formula: Expected Return = Risk Free Rate + Beta * Market Risk Premium. Without any information about the beta or market risk premium, it's difficult to estimate the expected return accurately. However, we can assume that the expected return will be higher than the risk-free rate since this is a risky security. Given that the answer choices all have higher percentages than the risk-free rate, we can eliminate A and B. We can also eliminate D and E because they are too high. Therefore, the best choice is C.

The Risk-Free Rate Is 3 A)290% B)3

The Risk-Free Rate Is 3 A)290%
B)3