Question

Assume that over the past 88 years, u. S. Treasury bills had an average return of 3. 5 percent as compared to 6. 1 percent on long-term government bonds. During this same time period, assume inflation averaged 3. 0 percent. What was the average nominal risk premium on the long-term government bonds?.

Answer 1

The average nominal risk premium on the long-term government bonds was 2.6 percent.

A risk premium is the expected investment return on an asset that is higher than the risk-free rate of return. The risk premium on an asset is a form of compensation for investors. It compensates investors for tolerating the additional risk in a given investment over that of a risk-free asset. Subtracting the return on risk-free investment from the return on investment yields the risk premium.

The nominal risk premium is:

Nominal Risk-Free Rate - Inflation Premium = Real Risk-Free Rate. Nominal rates are the rates we encounter on a daily basis, such as interest rates from banks and other financial institutions.

Nominal risk premium = 6.1 % -3.5 %

= 2.6%.

Learn more about risk premium here-

brainly.com/question/15570868

#SPJ4