Question

Last year, T-bills returned 1.8 percent while your investment in large-company stocks earned an average of 5.8 percent. Which one of the following terms refers to the difference between these two rates of return?

A. Standard deviation
B. Treasury bills
C. Geometric return
D. Risk premium
E. Inflation rate

Answer 1

Option D. Risk premium, is the right answer.

Step-by-step explanation:

Given the interest or return earned on the T-bill = 1.8 per cent.

The return earned on the investment made in a large company = 5.8 per cent.

Since we know that the difference between the return by the stock market and risk-free return is the risk premium. Below is the formula.

Risk premium = Return from large company (return by the stock market) – return on T bills (risk-free return)

Therefore, the Option D risk premium is correct.