Question

If 1-Year Treasuries are yielding 5%, all preferred stocks are yielding 10%, and a manager selects a portfolio of preferred stocks yielding 15%, the risk premium for investing in the manager's preferred stock selections is _____

Answer 1

Answer:

The risk-premium for investing in the manager's preferred stock selection is 10%

Explanation:

Risk-premium is the excess of return on manager's preferred stock selection over the risk-free rate. Risk-free rate is the rate of return on treasury stocks, which is 5%. Thus, the excess return is 15% minus 5%, which equals 10%.

Answer 2

Answer:

Risk Premium is 10%

Explanation:

Government treasuries represent risk free rate of return.

[tex]Risk Premium=R_{m}-R_{f}/tex] ,

where, [tex]R_{f} = Risk\ Free\ Rate\ Of\ Return/[tex]

           [tex]R_{m} = Market\ Rate\ Of\ Return/[tex]

           Risk Premium = 15 - 5 = 10%

Risk Premium is defined as return earned on market portfolio in excess of rate of return earned on risk free assets such as government treasury bonds.

So, Risk Premium refers to the compensation an investor expects to earn for assuming higher risk by investing in market portfolio instead of investing his money in risk free class of assets.