The nominal interest rate on a risky investment equals the risk-free rate plus a risk premium.

Question

Quizplus · Accepted Answer

This statement is true according to the concept of the risk premium. The risk premium is the additional return that investors demand to compensate them for taking on additional risk. Therefore, the nominal interest rate on a risky investment should be higher than the risk-free rate, and the difference between them represents the risk premium.

The Nominal Interest Rate on a Risky Investment Equals the Risk-Free