Suppose a Security with a Risk-Free Cash Flow of $1000

question 80

Multiple Choice

Suppose a security with a risk-free cash flow of $1000 in one year trades for $909 today.If there are no arbitrage opportunities,then the current risk-free interest rate is closest to:

• A)8%
• B)10%
• C)11%
• D)12%

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Definitions:

Market Risk Premium

The additional return expected by investors for taking on the risk of investing in the stock market over a risk-free rate.

Risk-Free Rate

The theoretical rate of return of an investment with no risk of financial loss, often represented by government bonds.

Portfolio Expected Return

The expected return on a portfolio is the weighted average of the anticipated returns of all the securities included in the portfolio, based on their proportions and expected performances.

Portfolio Required Return

The minimum expected return on an investment portfolio that an investor is aiming for, based on their investment goals and risk tolerance.