Question

On a particular risky investment, investors require an excess return of 7 percent in addition to the risk-free rate of 4 percent. What is this excess return called?

Answer 1

Answer:

Risk Premium

Explanation:

The Excess rate received over the risk free rate to a investor who invested in a risky asset is known as Risk premium. The concept of High Risk High Reward and Low Risk Low Reward applicable here. As in risky investment the investor is exposed to the risk of loss so, he/she requires some extra return for this exposure. Investing in risk free rate is much safer than in a risky investment.