You own three securities.Security A has an expected return of 11 percent as compared to 14 percent for Security B and 9 percent for Security C.The expected inflation rate is 4 percent and the nominal risk-free rate is 5 percent.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 percent greater than Security A's risk premium.
D) The risk premium on Security C is 5 percent.
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 has a risk premium of 6% (11% - 5%), Security B has a risk premium of 9% (14% - 5%), and Security C has a risk premium of 4% (9% - 5%). The risk premium on Security B is 50% greater than that of Security A (9% is 50% more than 6%).

You Own Three Securities