Question

Problem 11-6 Risk Premiums (LO1)Assume these are the stock market and Treasury bill returns for a 5-year period: Year Stock Market Return (%)T-Bill Return (%)2011 0.98 0.03 2012 16.06 0.05 2013 33.06 0.07 2014 12.71 0.05 2015 0.67 0.21 a. What was the risk premium on common stock in each year

Answer 1

Answer:

Year _______Risk Premium (%)

2011 _______ 0.95

2012_______ 16.01

2013_______ 32.99

2014_______ 12.66

2015_______ 0.46

Explanation:

The Risk premium is the premium paid to an investor for investing in a risky stock/security/asset over the risk-free rate in the market.

A Risk-free rate is a rate that is offered by a security having minimum or no risk at all e.g. Rate on Government securities are considered as the risk-free rate because these securities are backed by the government.

T bills or Treasury bills are also considered as risk-free investments.

Use following formula to calculate the Risk premium

Ris premium = Stock Market Return - T-Bill Return

Use above formula Calculate the risk premium as below

Year _ Stock Market Return (%) __T-Bill Return (%)__ Risk Premium (%)

2011 _______ 0.98 _______________0.03 _________ 0.95

2012_______ 16.06_______________0.05 _________ 16.01

2013_______ 33.06_______________0.07 _________ 32.99

2014_______ 12.71 _______________ 0.05  _________ 12.66

2015_______ 0.67 _______________ 0.21 __________  0.46