Select the one answer that best explains the implications of a negative market risk premium. A:...

Select the one answer that best explains the implications of a negative market risk premium.

A:	downside Volatility

B:	the responsiveness of the market to movements in beta

C:	the additional return expected above the risk-free rate to compensate for investing in risky assets

D:	the maximum gain will equal the risk-free rate

E:	the additional cost of investing in risky assets

F:	the solutions will fall on the left (negative side) of a normal distribution

Solutions

Expert Solution

Market Risk Premium = Return on Market Portfolio - Risk Free Rate

If the Market Risk Premium is negative then, Return on Market Portfolio < Risk Free Rate

Hence, the maximum gain someone can get with negative market risk premium is equal to the risk free rate

Correct Answer -

D. the maximum gain will equal the risk free rate

Wrong Answer -

B. the responsiveness of the market to movements in beta - beta measures the responsiveness of an asset with respect to the market portfolio

C. the additional return expected above the risk-free rate to compensate for investing in risky assets - additional returns will exist with a positive market risk premium

E. the additional cost of investing in risky assets - cost of investment is the same rate for assets classified under the same category (doesn't matter they are more risky or less)

A. & F. are not related to the negative market risk premium

jeff jeffy answered 1 year ago

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