The risk premium for common stocksA) cannot be zero, for investors would be unwilling to invest in common stocks.B) must always be positive, in theory.C) is negative, as common stocks are risky.D) cannot be zero, for investors would be unwilling to invest in common stocks and must always be positive, in theory.E) cannot be zero, for investors would be unwilling to invest in common stocks and is negative, as common stocks are risky.

Question

The risk premium for common stocksA)  cannot be zero, for investors would be unwilling to invest in common stocks.B)  must always be positive, in theory.C)  is negative, as common stocks are risky.D)  cannot be zero, for investors would be unwilling to invest in common stocks and must always be positive, in theory.E)  cannot be zero, for investors would be unwilling to invest in common stocks and is negative, as common stocks are risky.

Brauer Jilka · Accepted Answer

Final Answer : D, Explanation :  The risk premium for common stocks is the extra return investors require to compensate them for the risk of investing in stocks as opposed to risk-free securities. It cannot be zero because investors need an incentive to invest in riskier assets like common stocks instead of risk-free assets. Therefore, it must always be positive in theory to compensate for the higher risk associated with common stocks.

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