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Is it possible for the risk premium to be negative before an investment is undertaken? Can the...

Question:

Is it possible for the risk premium to be negative before an investment is undertaken? Can the risk premium be negative after the fact?

Risk:

However, they can be costly when the risk outweighs the reward ? a situation known as a negative risk premium. A prime example of such a premium occurs when stocks ? which carry more inherent risk than bonds and usually pay a higher risk premium ? generate returns lower than those of the less-risky bond A risk premium is the return in excess of the risk-free rate of return that an investment is expected to yield.

Answer and Explanation:

Is it possible for the risk premium to be negative before an investment is undertaken? Can the risk premium be negative after the fact?

However, they can be costly when the risk outweighs the reward ? a situation known as a negative risk premium. A prime example of such a premium occurs when stocks ? which carry more inherent risk than bonds and usually pay a higher risk premium ? generate returns lower than those of the less-risky bonds.


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How to Calculate Risk Premium: Definition & Formula

from Financial Accounting: Help and Review

Chapter 5 / Lesson 26
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