The risk premium that is offered on common stock is equal to the:
A) expected return on the stock.
B) real rate of return on the stock.
C) excess of expected return over a risk-free return.
D) expected return on the S&P 500 index.

Question

Quizplus · Accepted Answer

The risk premium is the amount of return an investor expects to receive above the risk-free rate of return for investing in a risky asset. Therefore, the risk premium is the excess of expected return over a risk-free return. Choice A, expected return on the stock, is not correct as it does not take into consideration the risk of the stock. Choice B, real rate of return on the stock, is incorrect as it does not account for inflation. Choice D, expected return on the S&P 500 index, is incorrect as it is a measure of the overall stock market performance and not specific to the stock in question.

The Risk Premium That Is Offered on Common Stock Is