What is a risk premium?
The premium is adjusted for the risk of the asset. An asset with zero risk and, therefore, zero beta, for example, would have the market risk premium canceled out. On the other hand, a highly risky asset, with a beta of 0.8, would take on almost the full premium.
Which statement correctly explains the difference between price risk and Reinvestment risk?
Which statement correctly explains the difference between price risk and reinvestment risk? When market interest rates rise, both price risk and reinvestment risk rise also. Price risk is positively correlated to interest rates, reinvestment risk is inversely correlated.
How to calculate market risk premium from cost of equity?
Cost of Equity CAPM formula = Risk-Free Rate of Return + Beta * (Market Rate of Return – Risk-free Rate of Return) here, Market Risk Premium Formula = Market Rate of Return – Risk-Free Rate of Return. The difference between the expected return from holding an investment and the risk-free rate is called a market risk premium.