What is Risk Premium ?

Expert Solution

Risk Premium

A risk premium is the return in excess of the risk-free rate of return an investment is expected to yield. The risk-free rate of return is the theoretical rate of return of an investment with zero risk. In simple words for an asset, risk premium is a form of compensation or extra return for investor for taking the extra risk compared to risk free return. The risk premium is calculated by deducting the risk-free return from the actual return.

jeff jeffy answered 2 years ago

a). What is the market risk premium if the risk free rate is 5% and the...

a). What is the market risk premium if the risk free rate is 5% and the expected market return is given as follows? State of nature Probability Return Boom 20% 30% Average 70% 15% Recession 10% 5% b). A firm is evaluating two projects that are mutually exclusive with initial investments and cash flows as follows: Project A Project B Initial Investment End-of-Year Cash Flows Initial Investment End-of-Year Cash Flows RM40,000 RM 20,000 RM 90,000 RM 40,000 RM 20,000 RM...

What type of risk does beta measure? Is this risk associated with the risk premium of...

What type of risk does beta measure? Is this risk associated with the risk premium of an asset?

Explain the concept of risk and a risk premium as it pertains to economics. What purpose...

Explain the concept of risk and a risk premium as it pertains to economics. What purpose do risk premiums serve? Which would you expect to have a higher risk premium: stocks or bonds?

Calculation of the risk premium.

The risk-free rate is 2% and the market risk premium is 5%. What is the required...

The risk-free rate is 2% and the market risk premium is 5%. What is the required return on a portfolio of stocks A and B given the information below: Stock Weight Beta A 30% 1.0 B 70% 0.5

Assume that the risk-free rate is 3.5% and the market risk premium is 3%. What is...

Assume that the risk-free rate is 3.5% and the market risk premium is 3%. What is the required return for the overall stock market? Round your answer to two decimal places. % What is the required rate of return on a stock with a beta of 1.9? Round your answer to two decimal places. %

What is meant by “risk premium”? Risk premiums on corporate bonds are usually anticyclical; that is,...

What is meant by “risk premium”? Risk premiums on corporate bonds are usually anticyclical; that is, they decrease during business cycle expansions and increase during recessions. Why is this so?

What are this three methods: historical risk premium, surveys of experts, and forward risk premiums. What...

What are this three methods: historical risk premium, surveys of experts, and forward risk premiums. What would you do if the three methods varied significantly?

What are the differences among the Market return, the Market risk premium, the Market risk price,...

What are the differences among the Market return, the Market risk premium, the Market risk price, and the return on an individual asset or a portfolio of assets versus the asset’s or portfolio’s risk premium?

I have figured out the risk premium and average risk premium for the question below. I'm...

I have figured out the risk premium and average risk premium for the question below. I'm having trouble figuring out what the standard deviation of the risk premium is. 2006 18.67 7.50 2007 9.01 7.16 2008 −39.83 2.80 2009 30.90 0.80 2010 20.56 0.92 The average risk premium is 4.03% but can't figure out how to calculate standard deviation of the risk premium. Yes, an excel function will do. Thank you.

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