Question

Over a certain period, large-company stocks had an average return of 12.34 percent, the average risk-free rate was 2.53 percent, and small-company stocks averaged 17.25 percent. What was the risk premium on small-company stocks for this period

Answer 1

Answer: 14.72%

Step-by-step explanation:

Risk premium is the amount of return that an investment provides over the risk free return of the market. This is to cater for the higher risk that an investor would incur for investing in the stock.

Risk premium for small company stocks = Average return for small stocks - Risk free rate

= 17.25% - 2.53%

= 14.72%