[amp_mcq option1=”current risk premium” option2=”past risk premium” option3=”beta premium” option4=”expected premium” correct=”option1″]
The correct answer is: A. current risk premium
The current risk premium is the difference between the expected return on a risky asset and the risk-free rate of return. In this case, the risky asset is common stock and the risk-free asset is Treasury bonds. The expected return on common stock is higher than the current yield on Treasury bonds because common stock is a riskier investment.
The past risk premium is the difference between the actual return on a risky asset and the risk-free rate of return over a past period of time. The beta premium is the additional return that investors demand for holding a stock with a beta greater than 1. The expected premium is the return that investors expect to earn on a risky asset.
Here is a table that summarizes the differences between the four options:
| Option | Description |
|—|—|
| Current risk premium | The difference between the expected return on a risky asset and the risk-free rate of return. |
| Past risk premium | The difference between the actual return on a risky asset and the risk-free rate of return over a past period of time. |
| Beta premium | The additional return that investors demand for holding a stock with a beta greater than 1. |
| Expected premium | The return that investors expect to earn on a risky asset. |