QuestionAugust 6, 2025

Which one of the following statements is correct? Select one: a. The greater the volatility of returns, the greater the risk premium. b. The lower the volatility of returns, the greater the risk premium. c. The lower the average return, the greater the risk premium. d. The risk premium is unrelated to the average rate of return. e. The risk premium is not affected by the volatility of returns.

Which one of the following statements is correct? Select one: a. The greater the volatility of returns, the greater the risk premium. b. The lower the volatility of returns, the greater the risk premium. c. The lower the average return, the greater the risk premium. d. The risk premium is unrelated to the average rate of return. e. The risk premium is not affected by the volatility of returns.
Which one of the following statements is correct?
Select one:
a. The greater the volatility of returns, the greater the risk premium.
b. The lower the volatility of returns, the greater the risk premium.
c. The lower the average return, the greater the risk premium.
d. The risk premium is unrelated to the average rate of return.
e. The risk premium is not affected by the volatility of returns.

Solution
4.1(321 votes)

Answer

a. The greater the volatility of returns, the greater the risk premium. Explanation 1. Define Risk Premium Risk premium is the return above the risk-free rate that investors require for taking on additional risk. 2. Relate Volatility to Risk Premium Greater volatility implies higher uncertainty, leading investors to demand a higher risk premium as compensation.

Explanation

1. Define Risk Premium<br /> Risk premium is the return above the risk-free rate that investors require for taking on additional risk.<br /><br />2. Relate Volatility to Risk Premium<br /> Greater volatility implies higher uncertainty, leading investors to demand a higher risk premium as compensation.
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