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?
a) Risk premium = stock market return - risk free rate(T Bill)
1998: 23.42-4.86=18.56 ...
The standard deviation of the risk premium is mentioned.