Among the following types of investments, small-company stocks, large-company stocks, long-term corporate bonds, long-term government bonds, and U.S. Treasury bills, small-company stocks had a risk premium of 13.2 percent for the past 90 years. What does the term "risk premium" mean? Is the risk premium on small-company stocks considered to be relatively high or relatively low when compared to other investment classes? Explain why.

Among the following types of investments, small-company stocks, large-company stocks, long-term corporate bonds, long-term government bonds, and U.S. Treasury bills, small-company stocks had a risk premium of 13.2 percent for the past 90 years. What does the term "risk premium" mean? Is the risk premium on small-company stocks considered to be relatively high or relatively low when compared to other investment classes? Explain why.

Entrepreneurial Finance

6th Edition

ISBN:9781337635653

Author:Leach

Publisher:Leach

Chapter7: Types And Costs Of Financial Capital

Section: Chapter Questions

Problem 15DQ

See similar textbooks

Similar questions

Historical stock returns show that small - company stocks produced an average return of 17.4 percent, inflation averaged 3.1 percent, U.S. Treasury bills returned an average 3.8 percent, and long - term corporate bonds returned 6.2 percent. What was the risk premium on small - company stocks for that period?
Over the period of 1926-2014, which one of the following investment classes had the highest volatility of returns? Multiple Choice Large-company stocks U.S. Treasury bills Small-company stocks Long-term corporate bonds Long-term government bonds
Over a certain period, large-company stocks had an average return of 12.79 percent, the average risk-free rate was 2.62 percent, and small-company stocks averaged 17.61 percent. What was the risk premium on small-company stocks for this period?
Suppose we have the following returns for large-company stocks and Treasury bills over a six-year period: Year Large-Company stocks US Treasury bills 1 3.95% 6.53% 2 14.13 4.38 3 19.07 4.25 4 −14.61 7.30 5 −32.10 4.94 6 37.32 6.14 a. Calculate the arithmetic average returns for large-company stocks and T-bills over this period. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) b. Calculate the standard deviation of the returns for large-company stocks and T-bills over this period. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) c-1. Calculate the observed risk premium in each year for the large-company stocks versus the T-bills. What was the average risk premium over this period? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answer as a percent…
Assume that over the last several decades the total annual returns of large-company common stocks averaged 12.1% small company stocks averaged 16.5% long-term government bonds averaged 6% and us tbills averaged 3.4%. What was the average excess return earned by long-term government bonds and small company stocks respectively?
Assume the average return on utility stocks was 8.9% over the past 40 years. �If the average return on Treasury bills was 3.8% over that period, what is the historical risk premium for utility stocks?
You’ve observed the following returns on SkyNet Data Corporation’s stock over the past five years: 19 percent, 24 percent, 11 percent, −9 percent, and 13 percent. Suppose the average inflation rate over this period was 3.6 percent and the average T-bill rate over the period was 4.1 percent.a. What was the average real return on the company’s stock?b. What was the average nominal risk premium on the company’s stock?
The attached file contains hypothetical data for working this problem. Goodman Corporation’s and Landry Incorporated’s stock prices and dividends, along with the Market Index, are shown in the file. Stock prices are reported for December 31 of each year, and dividends reflect those paid during the year. The market data are adjusted to include dividends. The risk-free rate on long-term Treasury bonds is 8.04%. Assume that the market risk premium is 6%. What is the expected return on the market? Now use the SML equation to calculate the two companies' required returns.
In a year in which corporate bonds offered an average return of 9%, treasury bonds offered an average return of 7%, common stocks offered an average return of 16% and Treasury bills offered 3%. The market risk premium was: ______%.
The S&P stock index represents a portfolio comprised of 500 large publicly traded companies. On December 24, 2007, the index had a value of 1,410 and on December 24, 2008, the index was approximately 927. If the average dividend paid on the stocks in the index is approximately 5.0 percent of the value of the index at the beginning of the year, what is the rate of return earned on the S&P index? What is your assessment of the relative riskiness of investing in a single stock such as Google compared to investing in the S&P index (recall from Chapter 2 that you can purchase mutual funds that mimic the returns of the index)? Question content area bottom Part 1 The rate of return earned on the S&P 500 is enter your response here %. (Round to two decimal places.) Part 2 What is your assessment of the relative riskiness of investing in a single stock, such as Google, compared to investing in the S&P index? (Select the best choice…
Use the following table: Series Average return Large stocks 11.76 % Small stocks 16.46 Long-term corporate bonds 6.23 Long-term government bonds 6.10 U.S. Treasury bills 3.83 Inflation 3.10 a. Determine the return on a portfolio that was equally invested in large-company stocks and long-term corporate bonds. b. What was the return on a portfolio that was equally invested in small stocks and Treasury bills?
You’ve observed the following returns on Crash-n-Burn Computer’s stock over the past five years: 14 percent, –9 percent, 16 percent, 21 percent, and 3 percent. Suppose the average inflation rate over this period was 3.5 percent and the average T-bill rate over the period was 4.2 percent. a. What was the average real return on the company’s stock? b. What was the average nominal risk premium on the company’s stock?