18. Which one of the following is correct? A. The risk premium on a risk-free se

Question

18. Which one of the following 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-fee rate.

Explanation / Answer

The correct answer is

D. If a risky security is correctly priced, its expected risk premium will be positive.

It is true that if a security is risky and it is correctly priced then the risk premium comes out to be positive. Higher the security is risky higher is the return and vice-versa.

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