Question

Check my work Assume these are the stock market and Treasury bill returns for a 5-year period: Year 2013 2014 2015 2016 2017 Stock Market Return (%) 31.90 11.20 -1.90 13.30 21.60 T-Bill Return ($) 0.04 0.04 0.04 0.22 0.24 Required: a. What was the risk premium on common stock in each year? b. What was the average risk premium? c. What was the standard deviation of the risk premium? (Ignore that the estimation is from a sample of data.) Complete this question by entering your answers in the tabs below. Required A Required B Required C What was the risk premium on common stock in each year? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) Risk Premium Year 2013 2014 2015 2016 2017

Answer 1

Risk premium = Stock market return - T-bill return

a) Year 2013 : Risk premium = 31.90%-0.04 % = 31.86%

Year 2014 : Risk premium = 11.20%-0.04 % = 11.16%

Year 2015 : Risk premium = -1.90%-0.04 % = -1.94%

Year 2016 : Risk premium = 13.30%-0.22 % = 13.08%

Year 2017 : Risk premium = 21.60%-0.24 % = 21.36%

b) Average Risk premium = (31.86%+11.16%+ (-1.94%) + 13.08%+21.36%) / 5  

=15.104% or 15.10%

c) Variance of Risk premium = ((31.86%-15.104%)^2+(11.16%-15.104%)^2+(-1.94%-15.104%)^2+(13.08%-15.104%)^2+(21.36%-15.104%)^2)/5  

= 0.012601

So, Standard deviation of Risk premium = 0.012601^0.5 = 0.112254 or 11.23%