Assume these are the stock market and Treasury bill returns for a 5-year period: Stock Market T-Bill Return Return (%) Year (%) 2013 35.40 0.19 2014 14.80 0.19 2015 -4.70 0.19 2016 16.20 0.06 2017 25.40 0.08 Required: a. What was the risk premium on common stock in each year? b. What was the average risk premium? c. What was the standard deviation of the risk premium? (Ignore that the estimation is from a sample of data.)

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Market Efficiency

Market efficiency refers to the market's ability to provide investors with all available information about investment options for buying and selling securities. Market efficiency reflects the true value of securities without undervaluing or overvaluing them. When the quality and quantity of information increase, the market becomes more efficient, allowing it to reduce arbitrage and obtain higher market returns from investment. In a well-functioning market, everyone receives all information completely and immediately at no cost. It opens up a plethora of opportunities for investors to access various investment options.