Assume that an investor invests $100,000 in a business venture.He earns an economic profit of $5,000.If the rate of return on an investment of equal risk is 10%,what is the rate of return that he earned on his investment?

Question

Quizplus · Accepted Answer

The rate of return the investor earned on his investment is calculated as follows:
Rate of return = (Economic profit / Investment) x 100%
Rate of return = (5,000 / 100,000) x 100%
Rate of return = 5%
The rate of return on an investment of equal risk is 10%. Therefore, the investor earned a lower rate of return than what he would have earned on a similar investment. The difference between the two rates of return is called the risk premium. In this case, the risk premium is 5%. 
To calculate the risk premium, we subtract the rate of return the investor earned from the rate of return on an investment of equal risk:
Risk premium = 10% - 5%
Risk premium = 5%
Therefore, the investor earned a rate of return of 5% and a risk premium of 5%. The best choice is B, 15%.

Assume That an Investor Invests $100,000 in a Business Venture