A manager is indifferent between rates of return satisfying i = 0.08 + 0.02 $\sigma$( $\sigma$ is the standard deviation).The manager's risk premium for $\sigma$= 2 is:
A) 0%.
B) 2%.
C) 4%.
D) 8%.
E) 12%.

Question

A manager is indifferent between rates of return satisfying i = 0.08 + 0.02 $\sigma$( $\sigma$ is the standard deviation).The manager's risk premium for  $\sigma$= 2 is:
A) 0%.
B) 2%.
C) 4%.
D) 8%.
E) 12%.

Quizplus · Accepted Answer

Since the manager is indifferent between rates of return, the risk premium must be equal to the expected return minus the risk-free rate. 
Plugging in F1F1F1S1F1F1F10 = 2, we get: 
i = 0.08 + 0.02(2) = 0.12 
Thus, the risk premium is 0.12 - 0.08 = 0.04 or 4%. Therefore, the best choice is C.

A Manager Is Indifferent Between Rates of Return Satisfying I σ\sigmaσ

A Manager Is Indifferent Between Rates of Return Satisfying I $\sigma$