Not all investors are interested in accepting extra risk in order to receive a h

Question

Not all investors are interested in accepting extra risk in order to receive a higher return. Investors can be classified as risk adverse, risk neutral, or risk seeking. To determine the risk associated with an investment, calculations are made to determine the risk-free rate and the risk premium associated with the investment. Security 1 Security 2 Security 3 Risk-free Rate of Interest 3.00% 3.00% 3.00% Various Risk Rates Interest Rate Risk 1.00% 1.50% 1.25% Credit Risk 0.50% 0.25% 0.25% Inflationary Risk 0.50% 0.50% 0.50% Liquidity Risk 0.25% 0.25% 0.50% Market Risk 0.50% 0.50% 0.50% Business Risk 1.25% 0.50% 1.50% Security 1 Security 2 Security 3 Risk Premium Nominal Rate of Interest Expected Annual Return* QUESTIONS: Fill in the blank spaces for risk premium, nominal rate of interest and expected annual return. *What is the minimum about of interest an investor would require for each of these securities.

Explanation / Answer

sec 1 sec 2 sec3

Risk premium 4% 3.5% 4.5%

nominal rate of int 6.5% 6% 7%

expected annual return 7% 6.5% 7.5%

min int should be atleast 3%.

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