Risk Premium The annual return on the S&P 500 Index was 12.4 percent.The annual T-bill yield during the same period was 5.7 percent.What was the market risk premium during that year?
A)5.7 percent
B)6.7 percent
C)12.4 percent
D)18.1 percent

Question

Quizplus · Accepted Answer

The market risk premium is the excess return that investors demand for holding a risky asset such as the S&P 500 Index, over a risk-free asset such as T-bills. Therefore, the market risk premium can be calculated as the difference between the annual return on the S&P 500 index and the T-bill yield. 
Market Risk Premium = Annual return on S&P 500 - T-bill Yield
Market Risk Premium = 12.4% - 5.7%
Market Risk Premium = 6.7% 
Therefore, the market risk premium during that year was 6.7%.

Risk Premium the Annual Return on the S&P 500 Index