Use the Table for the Question(s)below

question 22

Multiple Choice

Use the table for the question(s) below.
-Suppose a risky security pays an average cash flow of $100 in one year.The risk-free rate is 5%,and the expected return on the market index is 13%.If the returns on this security are high when the economy is strong and low when the economy is weak,but the returns vary by only half as much as the market index,what risk premium is appropriate for this security?

• A)4%
• B)6.5%
• C)9%
• D)11%

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Definitions:

Heuristics

Mental shortcuts or rules of thumb that simplify decision-making processes, often leading to rapid judgements or problem-solving strategies.

Displacement

A defense mechanism where mind shifts emotional impulses from a real object to a safer substitute target.

Productivity

Productivity refers to the measure of efficiency of a person, machine, factory, or system in converting inputs into useful outputs.

Own Language

The unique linguistic system developed and understood by specific individuals or groups, often seen in twins.