Question

Assume that over the past 85 years, the total annual returns on large-company common stocks averaged 12.3 percent, small-company stocks averaged 17.4 percent, long-term government bonds averaged 5.7 percent, and U.S. T-bills averaged 3.8 percent. What was the average risk premium earned by long-term government bonds, and small-company stocks respectively?

Answer 1

1.9%

13.6%

Step-by-step explanation:

Average risk premium earned by long-term government bonds =

long term average returns on Government bonds - average returns on US T-bills = 5.7% - 3.8% = 1.9%

Average risk premium earned by small-company stocks =

average returns on Company stock - average returns on US T-bills = 17.4% - 3.8% = 13.6%