The total annual returns on common stocks averaged 13.3% from 1957 to 2003. Small company stocks averaged 10.64%, long-term bonds averaged 8.96%, while Treasury Bills averaged 6.8%. What was the average risk premium earned by long-term Bonds, and small company stocks respectively?
A) 9.5%; 1.8%
B) 4.4%; 11.9%
C) 2.16%; 3.84%
D) 1.8%; 13.3%

Question

Quizplus · Accepted Answer

The risk premium is the return on an investment over the risk-free rate. Treasury Bills are often considered the risk-free rate. For long-term bonds, the risk premium is 8.96% - 6.8% = 2.16%. For small company stocks, it's 10.64% - 6.8% = 3.84%.

The Total Annual Returns on Common Stocks Averaged 13