Final answer:
The equity premium, or market risk premium, is the difference between the expected rate of return on an investment and the risk-free rate of return.
Step-by-step explanation:
The equity premium, also known as the market risk premium, is the difference between the expected rate of return on the market and the risk-free rate of return. The formula to calculate the equity premium is:
Equity Premium = Expected Rate of Return - Risk-Free Rate of Return
In this case, to determine the equity premium, subtract the risk-free rate of return from the expected rate of return for Investment A and Investment B:
Equity Premium for Investment A = 15.8% - Risk-Free Rate of Return
Equity Premium for Investment B = 11.4% - Risk-Free Rate of Return
Without knowing the risk-free rate of return, we cannot calculate the exact equity premium. However, the equity premium represents the additional return investors expect to receive for taking on the added risk of investing in a particular asset or portfolio compared to a risk-free asset.