Consider the case of a simple one-period framework.If i = 12.50%, k = 14.85%, p = 0.98, and g = 0.85 what is the required risk premium (round to two decimals)?
A)0.34%
B)0.35%
C)0.98%
D)2.35%

Question

Quizplus · Accepted Answer

The required risk premium is calculated as k - i, which is 14.85% - 12.50% = 2.35%. However, the question asks for the risk premium in terms of the growth rate and probability, which is (k - i) * p * g = (14.85% - 12.50%) * 0.98 * 0.85 = 0.34%.

Consider the Case of a Simple One-Period Framework