The risk premium for risky stocks is the stock return:
A) Minus the risk-free rate.
B) Minus the large company stock return.
C) Minus the long-term corporate bond return.
D) Plus the risk-free rate.
E) Plus the large company stock return.

Question

Quizplus · Accepted Answer

The risk premium for risky stocks is the extra return an investor requires for taking on the additional risk of investing in a stock instead of a risk-free asset. It is calculated as the difference between the expected return on a risky asset (such as stocks) and the risk-free rate. Therefore, the correct answer is A, which is the stock return minus the risk-free rate.

The Risk Premium for Risky Stocks Is the Stock Return