Question

Investors require a 3 percent return on risk-free investments. On a particular risky investment, investors require an excess return of 7 percent in addition to the risk-free rate of 3 percent. What is this excess return called?
1) Required return
2) Average return
3) Real return
4) Risk premium
5) Inflation premium

Answer 1

Answer:

The correct answer is 4

Explanation:

Risk Premium is the excess return of the risk free rate of return which an investment is anticipated or expected to yield. And the risk premium of asset is a kind or form of compensation for the investors who are ready to bear that some percentage of the extra risk.

So, in this case, the excess return of 7% on the risk free rate of 3% will be known as the risk premium.