Question

Over the past five years, Teen Clothing stock produced returns of 18.7, 5.8, 7.9, 10.8, and 11.6 percent,respectively. For the same five years, the risk-free rate 5.2, 3.4, 2.8, 3.4, and 3.9 percent, respectively.What is the arithmetic average risk premium on Teen Clothing stock for this time period?A. 6.89 percentB. 7.01 percentC. 7.22 percentD. 7.34 percentE. 7.57 percent

Answer 1

Answer:

The correct answer is  C. 7.22 percent

Explanation:

To find the arithmetic risk premium for the 5 year period, the formula is

Average risk premium for the period =  Sum of risk premium for each year /  number of years = ∑ra(i) - rf(i) / n

ra = asset or investment return / 100

rf = risk free return / 100

Where i represents each year.

Sum of risk premium for each year = (0.187 - 0.052) + (0.058 - 0.034) + (0.079 - 0.028) + (0.108 - 0.034) + (0.116 - 0.039) = 0.361

Average risk premium = 0.361 / 5 = 0.0722 = 7.22 / 100 = 7.22 percent