Question

If the average annual rate of return for common stocks is 11.7 percent, and 4.0 percent for U.S. Treasury
bills, what is the average market risk premium?

Answer 1

Answer:

7•7

Explanation:

Market risk premium=Average rate of return-Risk free premium

=11.7-4.0

=7.7

Answer 2

Given:

The average annual rate of common stocks = 11.7%

The average annual rate in U.S. = 4%

To find:

the average market risk premium =?

Explanation:

• The market risk premium is defined as the difference between the expected rate of returns on a market portfolio and the rate considered risk-free.
• Investors are required to compensate for the risk and the cost of opportunity.

• The average risk premium is calculated by subtracting the return on risk-free investment from the return on investment.
• The average risk Premium formula helps to get a rough estimate of expected returns on a relatively risky investment as compared to that earned on a risk-free investment.

• Acoording to the problem,

       The average market risk premium = 11.7 - 4.0

                                                                  = 7.7 %

The required average market risk premium is 7.7%.