How is a rate of return calculated on the basis of the risk premium and the risk- free rate?
A) A premium is subtracted from the risk- free discount rate.
B) A risk premium is added to the risk- free discount rate.
C) The risk- free rate is discounted to create a premium.
D) The premium rate is discounted to minimise risk.

Question

Quizplus · Accepted Answer

To calculate a rate of return based on the risk premium and the risk-free rate, we add the risk premium to the risk-free discount rate. This is because the risk premium represents the additional return an investor expects to receive for taking on additional risk beyond the risk-free rate, so it needs to be added to the risk-free rate to calculate the total rate of return.

How Is a Rate of Return Calculated on the Basis