You Own Three Securities

question 12

Multiple Choice

You own three securities.Security A has an expected return of 11 percent as compared to 14 percent for Security B and 9 percent for Security C.The expected inflation rate is 4 percent and the nominal risk-free rate is 5 percent.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 percent greater than Security A's risk premium.
• D) The risk premium on Security C is 5 percent.
• E) All three securities have the same expected risk premium.

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Definitions:

Homoscedasticity

A condition in regression analysis where the variance of the residuals, or errors, is constant across all levels of the independent variable.

Regression Line

A line of best fit through a dataset in linear regression analysis, showing the relationship between the independent and dependent variables.

Independent Variable

An independent variable is a variable that is manipulated to determine its effects on another variable.

Normal Distribution

A probability distribution demonstrating symmetry around the mean, indicating that data points close to the mean occur more often than those far from it.