Question

Over the period of 1926-2008: the risk premium on large-company stocks was greater than the risk premium on small- company stocks. U.S. Treasury bills had: a) the risk premium that was just slightly over 2 percent. b) the risk premium on long-term government bonds was zero percent. c) the risk premium on stocks exceeded the risk premium on bonds. d) U. S. Treasury bills had a negative risk premium.

Answer 1

Three different concepts and questions are mixed here:

Over the period of 1926-2008: the risk premium on large-company stocks was greater than the risk premium on small- company stocks. FALSE, THE RISK PREMIUM OF LARGE COMPANIES WAS LOWER. SMALL COMPANIES HAD THE HIGHEST VOLATILITY OF ALL STOCKS.

U.S. Treasury bills had:

• the lowest standard deviation of returns.

During 1926-2011,

• c) the risk premium on stocks exceeded the risk premium on bonds.

The risk premium of stocks exceeded by a lot the risk premium of bonds. The risk premium of bonds is generally referred to as the risk free rate.