Risk Premiums
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Risk Premiums. Here are stock market and Treasury bill returns between 1997 and 2001:
Year: 1997 Stock Market Return= 31.29 T-Bill Return = 5.26
Year: 1998 Stock Market Return = 23.43 T-Bill Return = 4.86
Year: 1999 Stock Market Return = 23.56 T-Bill Return = 4.68
Year: 2000 Stock Market Return = -10.89 T-Bill Return = 5.89
Year: 2001 Stock Market Return = -10.97 T-Bill Return = 3.83
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?
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Solution Summary
The standard deviation of the risk premium is mentioned.
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a) Risk premium = stock market return - risk free rate(T Bill)
1997: 31.29-5.26=26.03
1998: 23.42-4.86=18.56 ...
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