ECONOMICS
RISK AND RETURN
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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the asset is risky
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These assets are of interest to many investors
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asset liquidity
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compensation that investors want from the risks they face
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Detailed explanation-1: -What Is a Risk Premium? A risk premium is the investment return an asset is expected to yield in excess of the risk-free rate of return. An asset’s risk premium is a form of compensation for investors. It represents payment to investors for tolerating the extra risk in a given investment over that of a risk-free asset.
Detailed explanation-2: -The market risk premium is the difference between the expected return on a market portfolio and the risk-free rate. It provides a quantitative measure of the extra return demanded by market participants for an increased risk.
Detailed explanation-3: -The five main risks that comprise the risk premium are business risk, financial risk, liquidity risk, exchange-rate risk, and country-specific risk. These five risk factors all have the potential to harm returns and, therefore, require that investors are adequately compensated for taking them on.
Detailed explanation-4: -This financial indicator represents the additional cost a country or company must bear to get the financing it needs. The less confident investors are, the higher the premium will be. The risk premium is particularly important in times of economic uncertainty..
Detailed explanation-5: -The market risk premium is the rate of return on a risky investment. The difference between expected return and the risk-free rate will give you the market risk premium. The market risk premium is used by investors who have a risky portfolio, rather than assets that are risk-free.