Calculating Risk Premium on Small-Company Stocks

What was the risk premium on small-company stocks for this period?

Over a certain period, large-company stocks had an average return of 12.19 percent, the average risk-free rate was 2.50 percent, and small-company stocks averaged 17.13 percent.

Final answer:

The risk premium on small-company stocks for this period is 14.63%.

To calculate the risk premium on small-company stocks, we need to subtract the risk-free rate from the average return of small-company stocks.

Given:

• Average return of large-company stocks: 12.19%
• Average risk-free rate: 2.50%
• Average return of small-company stocks: 17.13%

Formula to calculate risk premium:

Risk Premium = Average Return of Small-Company Stocks - Risk-Free Rate

Substituting the given values:

Risk Premium = 17.13% - 2.50%

Risk Premium = 14.63%

Therefore, the risk premium on small-company stocks for this period is 14.63%.