Question

Which one of the following statements is correct?

A. The risk premium on a risk-free security is generally considered to be one percent.
B. The expected rate of return on any security, given multiple states of the economy, must be positive.
C. There is an inverse relationship between the level of risk and the risk premium given a risky security.
D. If a risky security is correctly priced, its expected risk premium will be positive.
E. If a risky security is priced correctly; it will have an expected return equal to the risk-free rate

Answer 1

C. There is an inverse relationship between the level of risk and the risk premium given a risky security.

Step-by-step explanation:

Risky assets on average give a much higher return than risk-free assets, such as the government T-bills.

Risk premium is the distinction b/w the expected return on an asset which is risky and the return on an asset that is risk-free.