Over the past ten years, large-company stocks have returned an average of 8

Management Mar 03, 2021

Over the past ten years, large-company stocks have returned an average of 8.7 percent annually, long-term corporate bonds have earned 4.1 percent annually, and U.S. Treasury bills have returned 2.5 percent annually. How much additional risk premium would you have earned if you had invested in large-company stocks rather than long-term corporate bonds over those ten years?

Multiple Choice

1.7%
3.7%
4.2%
4.6%
6.4%

Expert Solution

Answer

So, the correct option is 4th "4.60%".

Explanation

Computation of Additional Risk Premium:

Risk premium on large company stocks = 8.7%-2.5% = 6.2%

Risk premium on long term corporate bonds = 4.1%-2.5% = 1.6%

So,

Additional Risk Premium = 6.2%-1.6% = 4.6%

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