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26 April, 09:00

Over a certain period, large-company stocks had an average return of 12.49 percent, the average risk-free rate was 2.56 percent, and small-company stocks averaged 17.37 percent. What was the risk premium on small-company stocks for this period?

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  1. 26 April, 09:21
    0
    14.81%

    Explanation:

    Data provided in the question:

    Average return on stocks = 12.49% = 0.1249

    Average risk-free rate = 2.56% = 0.0256

    Small-company stocks averaged = 17.37%

    Now,

    The Risk premium on small company stocks is

    = (Return on small company stocks) - (Risk free rate)

    or

    Risk premium on small company stocks = 17.37% - 2.56%

    or

    Risk premium on small company stocks = 14.81%
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