The Risk-Free Rate Is 3 A)209%
B)3

question 83

Multiple Choice

The risk-free rate is 3.5%. What is the expected risk premium on this security given the following information?
$\begin{array}{lcc}\text { State of the Economy }&\text { Probability}&\text { E(R) }\\\text { Boom } & .30 &15\% \\\text { Normal } & .55 &8\% \\\text { Recession } & .20 & -11 \%\end{array}$

• A)2.09%
• B)3.01%
• C)3.20%
• D)3.87%
• E)4.15%

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Definitions:

Wealth

The abundance of valuable financial assets or physical possessions which can be converted into forms that can be used for transactions or investments.

Von Neumann-Morgenstern

A utility theorem that represents individuals' preferences over risky choices, and is foundational in expected utility theory.

Utility Function

A mathematical model in economics that represents how different quantities of goods or services can provide satisfaction to consumers.

Income

The reward garnered over time, generally in a consistent pattern, from occupational or investment sources.