Assume that last year T-bills returned 2.2 percent while your investment in large-company stocks earned an average of 8.1 percent. Which one of the following terms refers to the difference between these two rates of return?

Question

BlackTom AI · Accepted Answer

Risk premium equals the excess return above the risk-free rate; here it is 8.1% − 2.2% = 5.9 percentage points.

1. Relevant knowledge points and concepts
- Risk-free rate: The return on a virtually riskless investment, typically proxied by T-bills (2.2% here).
- Expected/actual return on a risky asset: Return earned from large-company stocks (8.1% here).
- Risk premium: The additional return investors require (or earn) for bearing risk above the risk-free rate. It is computed as (return on risky asset) − (risk-free rate).
- Other terms: Standard deviation (measure of volatility), variance (square of standard deviation), arithmetic average return (simple average of returns), geometric average return (compounded average).

2. Step-by-step reasoning process
- Identify the risk-free return: 2.2% (T-bills).
- Identify the risky asset return: 8.1% (large-company stocks).
- Compute the excess: 8.1% − 2.2%.

3. Calculation with intermediate steps
- Subtract: 8.1 − 2.2 = (8.1 − 2.0) − 0.2 = 6.1 − 0.2 = 5.9.
- Therefore the difference = 5.9 percentage points (or 5.9%).

4. Why the correct answer is correct
- The difference between a risky asset’s return and the risk-free rate is, by definition, the risk premium. It quantifies compensation for bearing extra risk relative to T-bills. The numerical result of that definition applied to the given returns is 5.9%.

5. Why the other options are incorrect
- Standard deviation: Measures the dispersion of returns around the mean, not the difference between two returns.
- Variance: The square of the standard deviation; also a dispersion measure, not a return difference.
- Geometric average return: The compounded average growth rate over multiple periods; unrelated to the simple difference between two single-period returns.
- Arithmetic average return: The simple average of multiple returns across periods, not the excess over a risk-free rate.

6. Conclusion
The correct term for the 8.1% − 2.2% = 5.9% difference is Risk premium, which matches the provided answer.

Assume that last year T-bills returned 2.2 percent while your investment in large-company stocks earned an average of 8.1 percent. Which one of the following terms refers to the difference between these two rates of return?单项选择题

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