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In economics, cost is a measure of the:
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1. Introduction to Microeconomics
Introduction to Economics
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Which term refers to the excess return an asset earns based on the level of risk taken?
A
Market equilibrium
B
Opportunity cost
C
Risk premium
D
Marginal utility
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Understand that the question is asking for a term that describes the additional return an investor expects to receive as compensation for taking on extra risk beyond a risk-free asset.
Recall that 'Market equilibrium' refers to a state where supply equals demand in a market, not related to excess returns for risk.
Recognize that 'Opportunity cost' is the value of the next best alternative foregone, which is a broader economic concept and not specific to returns on risky assets.
Know that 'Marginal utility' relates to the additional satisfaction gained from consuming one more unit of a good, not related to financial returns or risk.
Identify that the term 'Risk premium' specifically means the excess return an asset earns over the risk-free rate as compensation for the risk taken.
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