In 2000, the S&P 500 Index earned 11 percent while the T-bill yield was 4.4 percent. 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 market (in this case, the S&P 500 Index return) and the risk-free rate (T-bill yield). Given the S&P 500 earned 11 percent and the T-bill yield was 4.4 percent, the market risk premium would be 11% - 4.4% = 6.6%, which is positive.

In 2000, the S&P 500 Index Earned 11 Percent While