Which of the following is true?
A) Risky assets on average do not earn a risk premium.
B) There is a reward for bearing risk, on average.
C) On average, the greater the risk, the lower the reward.
D) When comparing the common stock of two ﬁrms, the riskier one will have the lower price.
E) If a market is not eﬃcient, then all assets in that market will have the same reward to risk ratio.

Question

Quizplus · Accepted Answer

The reward for bearing risk is commonly referred to as the risk premium. It is the extra return an investor expects to earn for investing in a riskier asset. This concept is a fundamental principle in finance theory and is supported by empirical evidence. Therefore, option B is correct. Option A is incorrect as risky assets generally earn a higher risk premium than safe assets. Option C is incorrect as, on average, the greater the risk, the higher the reward. Option D is incorrect as the stock price is not solely determined by risk but also by other factors such as profitability and growth prospects. Option E is incorrect as inefficiencies in a market may lead to mispriced assets, resulting in varying reward to risk ratios.

Which of the Following Is True