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

Answer: (C)

Verified step by step guidance

1. 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.
2. Recall that 'Market equilibrium' refers to a state where supply equals demand in a market, not related to excess returns for risk.
3. 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.
4. 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.
5. 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.