The total annual returns on large company common stocks averaged 12.3% from 1926 to 2011,small company stocks averaged 17.4%,long-term government bonds averaged 5.8%,while Treasury Bills averaged 3.8%. What was the average risk premium earned by long-term government bonds,and small company stocks respectively?
A) 1.8%; 13.3%
B) 2.0%; 13.6%
C) 4.4%; 11.9%
D) 9.5%; 1.8%
E) None of these.

Question

Quizplus · Accepted Answer

The average risk premium for long-term government bonds is the difference between the average return of long-term government bonds (5.8%) and the average return of Treasury Bills (3.8%), which is 2.0%. The average risk premium for small company stocks is the difference between the average return of small company stocks (17.4%) and the average return of large company common stocks (12.3%), which is 5.1%. Therefore, the answer is B, which is the only choice that has the closest values to 2.0% and 5.1%.

The Total Annual Returns on Large Company Common Stocks Averaged