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:

Operations

The day-to-day activities involved in running a business that lead to the production of goods and delivery of services.

Journalizing

Journalizing is the process of recording transactions in a company's journal prior to posting them to the general ledger.

Posting Process

The procedure of transferring entries from a company's journal into the appropriate accounts in its ledger, which helps in summarizing financial activities.

Trial Balance

A financial record-keeping sheet that consolidates the balances of various ledgers into uniform debit and credit column totals.