In a year in which common stocks offered an average return of 18 percent, Treasury bonds offered 10 percent and Treasury bills offered 7 percent, the risk premium for common stocks was:
A)1 percent.
B)3 percent.
C)8 percent.
D)11 percent.

Question

Quizplus · Accepted Answer

The risk premium for an investment is calculated by subtracting the risk-free rate from the return of the investment. In this case, Treasury bills are often considered the risk-free rate, so the risk premium for common stocks is 18% (return from stocks) - 7% (risk-free rate from Treasury bills) = 11%.

In a Year in Which Common Stocks Offered an Average