Consider the following two investment alternatives.First,a risky portfolio that pays 15% rate of return with a probability of 40% or 5% with a probability of 60%.Second,a treasury bill that pays 6%.The risk premium on the risky investment is _________.
A) 1%
B) 3%
C) 6%
D) 9%

Question

Quizplus · Accepted Answer

The expected return of the risky portfolio is (0.4 * 15%) + (0.6 * 5%) = 9%. The risk premium is the difference between the expected return of the risky portfolio and the risk-free rate (treasury bill rate), which is 9% - 6% = 3%.

Consider the Following Two Investment Alternatives