Which of the following statements is most correct?
A) Usually higher expected returns are associated with higher risk premiums.
B) Usually higher risk premiums are associated with lower expected returns.
C) Usually lower expected returns are associated with higher risk premiums.
D) Usually expected returns are not associated with risk premiums.

Question

Quizplus · Accepted Answer

Generally, investors require higher expected returns to compensate for taking on higher risk. This compensation is referred to as a risk premium, and it is the additional return investors receive for holding a risky asset over a risk-free asset. Therefore, higher expected returns are usually associated with higher risk premiums.

Which of the Following Statements Is Most Correct