Market risk premium is defined as the difference between the market rate of return and the return on risk-free Treasury bills. a. True
b. False

a. True

Explanation:

Risk management can be defined as the process of identifying, evaluating, analyzing and controlling potential threats or risks present in a business as an obstacle to its capital, revenues and profits. This ultimately implies that, risk management involves prioritizing course of action or potential threats in order to mitigate the risk that are likely to arise from such business decisions.

In Financial accounting, one of the core risks any depository financial institution such as commercial banks must report and hold capital against is a market risk. Also, the other three (3) core risks banks are required to report and hold capital against are liquidity risk, operational risk and credit risk.

Market risk premium can be defined as a measure of the difference between a market rate of return on a market portfolio and the return on a risk-free investment such as government bonds (Treasury bills) or interest rate. A market risk premium is also referred to as the risk premium of a market portfolio.

Hence, the investors are the one who are expected or required to compensate for the opportunity cost and the risk associated with it.

Additionally, the market risk premium in financial accounting is equal to the slope of the security market line (SML), which is typically a graphical representation of the capital asset pricing model (CAPM).

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