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The compensation for investors who tolerate extra risk is called:
A. Cost of goods sold.
B. Rate of return
C. Risk premium.
D. Opportunity costs.
Risk premium is a term that is used to refer to the return in excess of the risk-free rate of return that an investment is expected to yield.
The risk premium of an asset refers to a kind of compensation that is given to the investors who tolerate the extra risk involved when investing in that particular asset, in comparison to the risk of a risk-free asset, in a given investment.
For instance, the high-quality corporate bonds which are issued by established corporations and earn large profits will typically have very little risk of default. Consequently, bonds of this nature will pay a lower interest rate, or yield, than bonds which are issued by companies that are less established and who have an uncertain profitability with a relatively higher default risk.
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