Which of the following will increase the expected risk premium for a security, all else constant?
I. an increase in the security's expected return
II. a decrease in the security's expected return
III. an increase in the risk-free rate
IV. a decrease in the risk-free rate
A)I only
B)III only
C)IV only
D)I and IV only
E)II and III only

Question

Quizplus · Accepted Answer

The expected risk premium for a security is calculated as the difference between the security's expected return and the risk-free rate. Therefore, an increase in the security's expected return (I) or a decrease in the risk-free rate (IV) would both increase the expected risk premium, all else constant.

Which of the Following Will Increase the Expected Risk Premium