Calculating Risk Premium on Small-Company Stocks
What was the risk premium on small-company stocks for this period?
Over a certain period, large-company stocks had an average return of 12.19 percent, the average risk-free rate was 2.50 percent, and small-company stocks averaged 17.13 percent.
Final answer:
The risk premium on small-company stocks for this period is 14.63%.
To calculate the risk premium on small-company stocks, we need to subtract the risk-free rate from the average return of small-company stocks.
Given:
- Average return of large-company stocks: 12.19%
- Average risk-free rate: 2.50%
- Average return of small-company stocks: 17.13%
Formula to calculate risk premium:
Risk Premium = Average Return of Small-Company Stocks - Risk-Free Rate
Substituting the given values:
Risk Premium = 17.13% - 2.50%
Risk Premium = 14.63%
Therefore, the risk premium on small-company stocks for this period is 14.63%.