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Assume these are the stock market and Treasury bill returns for a 5-year period: Year Stock Market Return (%) T-Bill Return (%) 2013 33.10 0.10 2014 12.60 0.10 2015 −3.10 0.10 2016 14.10 0.05 2017 23.20 0.07 Required: a. What was the risk premium on common stock in each year? b. What was the average risk premium? c. What was the standard deviation of the risk premium? (Ignore that the estimation is from a sample of data.)

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azikennamdi

The Risk Premium on common stock in each year is as given in the attached image.

What is Risk Premium?

A risk premium is a measure of additional return required by an individual to compensate for being exposed to a higher degree of risk.

What was the average risk premium?

The average risk premium is given as: 15.90. This is calculated by adding the risk premium for the 5-year period and dividing by 5:

(33 + 12.5 + -3.2 + 14.05 + 23.13)/5

= 15.896

[tex]\approx[/tex] 15.9

What was the standard deviation of the risk premium?

The standard deviation is computed as 12.04. See the attached image.

Learn more about risk premium:

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