Investors require a 4 per cent return on risk-free investments.On a particular risky investment,investors require an excess return of 7 per cent in addition to the risk-free rate of 4 per cent.What is this excess return called?

Question

Quizplus · Accepted Answer

The excess return that investors require in addition to the risk-free rate is called the "risk premium." This is the compensation investors demand for taking on additional risk above and beyond the risk-free rate. Options A, B, C, and D are not correct because the inflation premium relates to the expected increase in prices, the required return is a broader term that encompasses the risk-free rate and the risk premium, the real return is the return adjusted for inflation, and the average return refers to the historical or expected average of a particular investment.

Investors Require a 4 Per Cent Return on Risk-Free Investments