Use the following statements to answer this question:
I.The risk premium is the expected payoff needed to get out of a risky situation.
II.The insurance premium is the payment needed to get into a risky situation.
III.Risk-averse investors willingly take fair gambles.
A)I, II, and III are correct.
B)I, II, and III are incorrect.
C)I, II are correct, and III is incorrect.
D)I, II are incorrect, and III is correct.

Question

Quizplus · Accepted Answer

I. The risk premium is actually the return above the risk-free rate of return that investors require to compensate them for the risk of an investment, not a payoff to exit a risky situation. II. The insurance premium is the payment made for coverage against certain risks, not a payment to enter into a risky situation. III. Risk-averse investors typically avoid fair gambles because they prefer certainty and are willing to accept lower returns to avoid risk.

Use the Following Statements to Answer This Question