Question

In a year in which common stocks offered an average return of 12% and Treasury bills offered 3%. The risk premium for common stocks was:

Answer 1

Considering the information given, the Risk premium on stock is 9%.

Given Information

Expected return on market = 12%

Risk free rate = 3%

• The formula for Risk premium on stock is {Expected return on market - Risk free rate}

Risk premium on stock = 12% - 3%

Risk premium on stock = 9%

Hence, the Risk premium on stock is 9%.

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