One estimate of the market risk premium is provided by the difference between the average historical return on common stocks and the risk-free interest rate.

Question

Quizplus · Accepted Answer

The market risk premium is indeed estimated by taking the difference between the average historical return on common stocks and the risk-free interest rate. This is based on the idea that investors expect to receive a higher return for investing in stocks due to the increased risk involved compared to risk-free investments like government bonds.

One Estimate of the Market Risk Premium Is Provided by the Difference