Risk Premium The annual return on the S&P 500 Index was 18.1 percent. The annual T-bill yield during the same period was 6.2 percent. What was the market risk premium during that year?
A) 6.2%
B) 11.9%
C) 18.1%
D) 24.3%

Question

Quizplus · Accepted Answer

The market risk premium is the difference between the expected return on the market (measured by the S&P 500) and the risk-free rate (measured by T-bill yield).

Market risk premium = Expected market return - Risk-free rate
Market risk premium = 18.1% - 6.2%
Market risk premium = 11.9%

Therefore, the market risk premium during that year was 11.9%.

Risk Premium the Annual Return on the S&P 500 Index