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The average arithmetic return of the US stock market has been10%. The average annual corporate...

The average arithmetic return of the US stock market has been 10%. The average annual corporate bond return in the US has been 5%. The average 30-yr US Treasury bond return in the US has been 5%. Finally, the average annual US 1-month Treasury bill return in the US has been 3.5%. From this information, please calculate the equity risk premium within the US.

Solutions

Expert Solution

Equity Risk Premium = Market Rate of Return (Rm) - Risk free rate (Rf)

i.e. Rm - Rf

Market Rate of Return (Rm) = Average Arithmetic Return of US Stock Market = 10%

Risk free rate (Rf) = Average Annual US 1 month Treasury Bill Return = 3.5 %

Therefore Equity Risk Premium = 10 % - 3.5 % = 6.5 %

jeff jeffy answered 2 years ago
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