Which of the Following Is the Best Definition for the Concept

question 276

Multiple Choice

Which of the following is the best definition for the concept of risk premium?

• A) The excess return required from an investment in a risky asset over a risk-free investment.
• B) Market in which security prices reflect available information.
• C) A symmetric, bell-shaped frequency distribution that can be defined by its mean and standard deviation.
• D) The average compound return earned per year over a multi-year period.
• E) The hypothesis is that actual capital markets are efficient.

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Definitions:

Effective Interest Rate

The actual return on investment or cost of a loan, taking into account the compounding of interest, as opposed to the nominal rate.

Stated Interest Rate

The annual interest rate declared on a loan or investment, not taking into account compounding or fees.

Premium Amortized

The process of gradually writing off the initial cost of a premium over the period of the bond to match it with the interest earned.

Interest Cost

The cost incurred by an entity for borrowing funds, essentially the price paid for the use of borrowed money.