Final answer:
The risk premium includes uncertainties like interest rate risk and purchasing power risk, which can affect expected returns. Hence, the correct answer to which risks are included in the risk premium is option D) I and IV only.
Step-by-step explanation:
The risks included in the risk premium are various uncertainties that can impact the expected return on an investment. These risks accounts for higher potential yields that investors demand for taking on additional exposure and include:
- Interest rate risk - the risk of losing value in an investment due to changes in the interest rate environment.
- Liquidity risk - the risk that an investor may not be able to buy or sell an investment quickly without affecting its price.
- Financial risk - the possibility that a company's cash flow will not be adequate to meet its obligations.
- Purchasing power risk - also known as inflation risk, it represents the risk of monetary depreciation diminishing the real value of returns.
Of the options provided, the risks included in the risk premium are I. interest rate risk and IV. purchasing power risk, making answer D) I and IV only the correct selection. Both of these risks can influence the rate of return an investor demands for holding a particular asset, and they contribute to the calculation of the risk premium within financial markets.