Historically, the higher the risk premium, the ___________ the average return and the ___________ the standard deviation of the returns.
A) Lower; lower
B) Lower; higher
C) Higher; higher
D) Higher; lower
E) There is no relationship between the risk premium and the average return

Question

Quizplus · Accepted Answer

According to the capital asset pricing model, the risk premium is the difference between the expected return on the market and the risk-free rate, and it represents compensation for the additional risk taken on by investing in a risky asset. Therefore, a higher risk premium implies a higher expected return, which in turn implies a higher standard deviation of returns, as the volatility of returns tends to increase with higher expected returns.

Historically, the Higher the Risk Premium, the ___________ the Average