You Own Three Securities

question 61

Multiple Choice

You own three securities. Security A has an expected return of 11% as compared to 14% for Security B and 9% for Security C. The expected inflation rate is 4% and the nominal risk-free rate is 5%. Which one of the following statements is correct?

• A)There is no risk premium on Security C.
• B)The risk premium on Security A exceeds that of Security B.
• C)Security B has a risk premium that is 50% greater than Security A's risk premium.
• D)The risk premium on Security C is 5%.
• E)All three securities have the same expected risk premium.

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Definitions:

Good Z

A hypothetical product used in economic theory to illustrate concepts.

Milk

A nutritious liquid food produced by the mammary glands of mammals, widely consumed directly and used in a variety of dairy products.

Supply Curve

A graphical representation showing the relationship between the price of a good and the amount of the good that suppliers are willing and able to sell.

Ice Cream

A frozen dessert made from dairy products, such as milk and cream, combined with flavorings and sweeteners, often eaten as a snack or dessert.