Consider the following two investment alternatives: First, a risky portfolio that pays a 15% rate of return with a probability of 40% or a 5% rate of return with a probability of 60%. Second, a Treasury bill that pays 6%. The risk premium on the risky investment is ________.
A) 1%
B) 3%
C) 6%
D) 9%

Question

Quizplus · Accepted Answer

Risk premium = [.4(.15) + .6(.05)] - .06 = .03

Consider the Following Two Investment Alternatives: First, a Risky Portfolio