Question

Over a certain period, large-company stocks had an average return of 12.14 percent, the average risk-free rate was 2.49 percent, and small-company stocks averaged 17.09 percent. What was the risk premium on small-company stocks for this period?

a. 9.93%
b. 19.39%
c. 14.81%
d. 11.85%
e. 4.88%

Answer 1

14.6 percent

Step-by-step explanation:

Data provided in the question

The average return of large-company stock = 12.14 percent

The average risk-free rate of return = 2.49 percent

The average return of small-company stock = 17.09 percent

By considering the above information, the risk premium is

= Average return of small-company stock - Average risk-free rate of return

= 17.09 percent - 2.49 percent

= 14.6 percent

This is the answer but the same is not provided in the given options

We simply deduct the risk-free rate of return from the market return so that the risk premium could come