If U.S.Treasury bills are earning 4 percent and the stock investment you are considering has a potential return of 10 percent,you would be paid a ____ percent return to take the additional risk of investing in the stock.

Question

Quizplus · Accepted Answer

The additional return you would require to take on the risk of investing in the stock is called the risk premium. It is calculated by subtracting the risk-free rate (in this case, the T-bill rate of 4%) from the potential return of the stock (10%). So, the risk premium in this case is 10% - 4% = 6%. Therefore, you would need to be paid an additional 6% return to justify the additional risk of investing in the stock. This means your total expected return from the stock would be 10% + 6% = 16%. Choice B is the closest option as it is the only option that is larger than the risk-free rate and smaller than the potential return of the stock.

If USTreasury Bills Are Earning 4 Percent and the Stock Investment