Many Financial Managers Use Market Risk Premiums That Are Closer

question 2

Multiple Choice

Many financial managers use market risk premiums that are closer to 5%,which is lower than historical averages,because investors require a ________ risk premium for holding risky securities than in the past.

• A)lower
• B)higher
• C)similar
• D)none of the above

---

Definitions:

Real Rate Of Return

The annual percentage gain or loss on an investment, adjusted for inflation, providing a more accurate measure of the purchasing power of the return.

Risk Premium

The risk premium is the additional return an investor requires for choosing a risky investment over a risk-free asset, compensating for the extra risk undertaken.

Arithmetic Average Return

The simple average of a series of returns generated over a period of time.

Variance

A statistical measurement of the dispersion of returns for a given security or market index, indicating volatility.