The risk premium of an asset is deﬁned as the return on the asset in excess of the:
A) Current market rate of return.
B) Rate of inﬂation.
C) Risk-free rate of return.
D) Average return on the asset.
E) Average market rate of return.

Question

Quizplus · Accepted Answer

The risk premium of an asset is the return on the asset in excess of the risk-free rate of return. This is because the risk-free rate is assumed to be the minimum return investors require for taking on risk. Therefore, any return above that is considered as the reward for taking on risk and is called the risk premium.

The Risk Premium of an Asset Is Deﬁned as the Return