Question

In: Finance

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


Related Solutions

Choose the best answer Which of the following best explains what is the margin of error...
Choose the best answer Which of the following best explains what is the margin of error in a test or questionnaire? a. A statistic that tells us how many points the results may vary. b. A numerical index that illustrates the level of dispersion of a group. c. A data that expresses quantitatively the average of some scores. d. A statistic that demonstrates the level or degree of reliability.
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?
Open market bond purchases by the Federal Reserve will result in (select the best answer): a....
Open market bond purchases by the Federal Reserve will result in (select the best answer): a. An increase in the money supply and a decrease of interest rates. b. A decrease in the money supply and an increase of interest rates. c. A decrease of the stock market and a rise in the Hillman Paradox Complex to Stage Two Let’s say you run a company that sells gloves, and your goal is to maximize profits by increasing revenues. In consultation...
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...
3a)The additional risk inherent to a callable bond is best described as: Select one: A. credit...
3a)The additional risk inherent to a callable bond is best described as: Select one: A. credit risk. B. reinvestment risk. C. interest rate risk. D. market risk. b)A US Treasury Note with a $5,000 par value is quoted 106-10 – 106-15. A customer sell order would be executed, disregarding commissions, at which of the following prices assuming no change in the quote? Select one: A. $5,307.50 B. $1,061.50 C. $1,061.00 D. $5,315.63 c)If the bond’s price is higher than its...
Which of the following best measures an asset's risk? Select one: a. Expected return b. The...
Which of the following best measures an asset's risk? Select one: a. Expected return b. The cash return c. The standard deviation d. The probability distribution You are considering buying some stock in Continental Breakfast. Which of the following is an example of nondiversifiable risk? Select one: a. Risk resulting from a news release that there are issues with Continental's production b. Risk resulting from an explosion in a factory owned by Continental c. Risk resulting from a general decline...
The risk-free interest rate is 4.0%. The market risk premium or MRP is 6%. The market...
The risk-free interest rate is 4.0%. The market risk premium or MRP is 6%. The market index has a standard deviation of 20%. Habanero common stock has a standard deviation of 40% and a correlation coefficient of 0.40 with the market portfolio. Calculate the equity Beta and the required return for Habanero’s stock.
Use the following data to select one best answer to the following question: What is the...
Use the following data to select one best answer to the following question: What is the gross profit for the low-rise office building project by applying the Percentage of Completion method for recognizing revenue? A construction company began operations on January 2, 2010. During the year the company was awarded one construction contract of low-rise office building. The company incurred $100,000 operating expenses for the year for which $75,000 has been paid while the balance is owed as of December...
If the market risk premium is 2%, the risk-free rate is 4.4% and the beta of...
If the market risk premium is 2%, the risk-free rate is 4.4% and the beta of a stock is 1.2, what is the expected return of the stock?
The risk-free rate is 1.27% and the market risk premium is 7.65%. A stock with a...
The risk-free rate is 1.27% and the market risk premium is 7.65%. A stock with a β of 1.34 just paid a dividend of $1.29. The dividend is expected to grow at 20.50% for three years and then grow at 4.96% forever. What is the value of the stock? The risk-free rate is 1.13% and the market risk premium is 9.58%. A stock with a β of 1.16 just paid a dividend of $1.86. The dividend is expected to grow...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT