Question

Here are stock market and Treasury bill percentage returns between 2006 and 2010:

Year Stock Market Return T-Bill Return
2006 16.87 5.90
2007 6.91 5.76
2008 -38.53 2.20
2009 29.30 0.70
2010 18.86 1.02

What was the risk premium on common stock in each year? (Negative values should be indicated by a minus sign. Round your answers to 2 decimal places.)

Year Risk Premium
2006 %
2007 %
2008 %
2009 %
2010 %

Answer 1

The risk premium on common stock for each year is calculated by subtracting the T-Bill Return from the Stock Market Return. Values for each year are as follows: 10.97% (2006), 1.15% (2007), -40.73% (2008), 28.60% (2009), and 17.84% (2010).

Step-by-step explanation:

To calculate the risk premium on common stock for each year, you subtract the return on Treasury bills (T-Bills) from the stock market return for that year. The formula for the risk premium is:

Risk Premium = Stock Market Return - T-Bill Return

1. 2006: Risk Premium = 16.87% - 5.90% = 10.97%
2. 2007: Risk Premium = 6.91% - 5.76% = 1.15%
3. 2008: Risk Premium = -38.53% - 2.20% = -40.73%
4. 2009: Risk Premium = 29.30% - 0.70% = 28.60%
5. 2010: Risk Premium = 18.86% - 1.02% = 17.84%

These values represent the additional return that an investor would have earned for taking on the higher risk associated with stocks in comparison to the safer T-Bills for each respective year.