Over a certain period, large-company stocks had an average return of 12.09 percent, the average risk-free rate was 2.48 percent, and small-company stocks averaged 17.05 percent. What was the risk premium on small-company stocks for this period?

16.57%

Explanation:

According to the capital asset pricing model, the return on a stock is the risk-free rate plus the equity risk premium.

The risk-free rate is the minimum rate rate of return that an investor can earn by investing a risk-free security like treasury bill.

The equity risk premium is the additional return over and above the risk-free rate which an investor expect to earn on stock investment by taking additional risk. This is so because stocks are riskier than treasury bills.

The risk premium = expected return - risk-free rate

For a small-company, we find the difference between the expected return and the risk-free rate

Risk premium on a small company = 17.05 - 1.48

= 16.57%

14.57%

Explanation:

risk premium = small company stock return-risk free rate = 17.05-2.48=14.57%