Question

The average annual return on the S&P 500 Index from 1986 to 1995 was16.20 percent. The average annual T-bill yield during the same period was 4.80 percent. What was the market risk premium during these ten years?Average market risk premium ____ %.

Answer 1

Answer:

11.4%

Explanation:

Given that,

Average annual return on the S&P 500 Index from 1986 to 1995 = 16.20%

Average annual T-bill yield during the same period = 4.80%

Market risk premium is the difference between the expected return on the portfolio (market) and the risk free return.

Therefore,

Average market risk premium = Return on market - risk free return

                                                  = 0.1620 - 0.048

                                                  = 0.114 or 11.4%