In: Finance
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 |
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