Which of the following is a true statement?
A) To calculate the expected risk premium one needs the expected return on the risky asset and the return on a risk-free asset.
B) The risk premium is the difference between the return on a risky asset and the return on the market portfolio.
C) The expected return on an asset is equal to the sum of the possible returns divided by their probabilities.
D) Comparison of two different risky assets cannot be simpliﬁed by calculating the expected return for each.
E) Expected returns depend on the states of the economy but not the associated probabilities.

Question

Quizplus · Accepted Answer

The expected risk premium is calculated by subtracting the risk-free rate from the expected return on the risky asset. Therefore, to calculate it one needs both the expected return on the risky asset and the return on a risk-free asset. Option B is incorrect because the risk premium is the difference between the return on a risky asset and the risk-free rate, not the return on the market portfolio. Option C is incorrect because it describes the formula for calculating the expected return on an asset, not the expected risk premium. Option D is incorrect because comparing two different risky assets can be simplified by calculating the expected return for each and comparing them. Option E is incorrect because expected returns are calculated using probabilities associated with various states of the economy.

Which of the Following Is a True Statement