In 2000, the S&P500 Index earned 11% while the T-bill yield was 4.4%. Given this information, which of the following statements is correct with respect to the market risk premium?
A) The market risk premium must have been negative.
B) The market risk premium must have been positive.
C) The market risk premium must have been zero.
D) Unable to answer without more information.

Question

Quizplus · Accepted Answer

The market risk premium is calculated as the difference between the return on the stock market (S&P500 in this case) and the risk-free rate (T-bill yield). Therefore, the market risk premium for 2000 would be 11% - 4.4% = 6.6%. Since the result is positive, it means that the market risk premium must have been positive for that year.

In 2000, the S&P500 Index Earned 11% While the T-Bill