The expected risk premium on a stock is equal to the expected return on the stock minus the:
A) expected market rate of return.
B) risk-free rate.
C) inflation rate.
D) standard deviation.
E) variance.

Question

Quizplus · Accepted Answer

The risk premium is the compensation an investor receives for taking on risk when investing. The risk-free rate represents the return an investor can earn with zero risk, so the expected return on a stock minus the risk-free rate represents the extra return an investor expects to earn for taking on the additional risk of investing in that stock. Therefore, option B is the correct answer.

The Expected Risk Premium on a Stock Is Equal to the Expected