The market risk premium is a reflection of the investment community's level of risk aversion. It is calculated by:
A)subtracting the return on the market from the risk-free rate.
B)multiplying the beta of a stock by the result of subtracting the risk-free rate from the return on the market.
C)subtracting the risk-free rate from the return on the market.
D)multiplying beta of a stock by the expected return on the market.

Question

Quizplus · Accepted Answer

The market risk premium is the difference between the expected return on the market and the risk-free rate. It represents the extra return that investors require for taking on the risk of investing in the stock market. Option A is incorrect because it only calculates the equity risk premium. Option B is incorrect because it calculates the expected return of a stock, not the market risk premium. Option D is incorrect because it uses the expected return on the market, rather than the actual return.

The Market Risk Premium Is a Reflection of the Investment