Question

A risk premium A. is the minimum amount a decisionminusmaker would pay to avoid taking a risk. B. is the maximum amount a decisionminusmaker would pay to avoid taking a risk. C. is required to get a riskminusneutral person to make a fair bet. D. is the maximum amount needed to compensate a decisionminusmaker to willingly take a risk.

Answer 1

Answer:

D

Explanation:

The risk premium is the difference in interest rate between two parties. It can also be defined as the overprice that a country pays to be financed by markets, in comparison with other country. The risk premium is popular in the bonds market. For example, country A has bond interest rate of 4% and country B has bond interest rate of 6%, the risk premium is the difference between both interest rates: 2%. We can conclude that country B is riskier than country A because it offers a reward to investors (2% more) to acquire their debt.

According to this, the risk premium is the maximum amount that a decision maker needs to compensate risk. The risk premium is defined by how risky a country is. (I would say that it is the minimum amount needed to compensate risk, but this is the answer that better fits with the risk premium definition).