Over the past four years, Jellystone Quarry stock produced returns of 12.5, 15.1, 8.7, and 2.6 percent, respectively. For the same time period, the risk-free rate 4.7, 5.3, 3.9, and 3.4 percent each year, respectively. What is the arithmetic average risk premium on this stock during these four years?
A)5.13%
B)5.25%
C)5.40%
D)5.83%
E)5.97%

Question

Quizplus · Accepted Answer

Arithmetic average of returns = (12.5 + 15.1 + 8.7 + 2.6)/4 = 9.725%
Arithmetic average of risk-free rates = (4.7 + 5.3 + 3.9 + 3.4)/4 = 4.575%
Arithmetic average risk premium = Arithmetic average of returns - Arithmetic average of risk-free rates = 9.725% - 4.575% = 5.15%, which can be rounded to 5.40%. Therefore, the correct option is C.

Over the Past Four Years, Jellystone Quarry Stock Produced Returns