For the period 1926-2011, small-company stocks had

For the period 1926-2011, small-company stocks had a risk premium of 12.6 percent. What does the term risk premium mean? Is the risk premium on these stocks considered to be relatively high or relatively low as compared to other investment classes? Explain why?


14-09-20 | 07:46:28

A risk premium is the return in excess of the risk-free rate of return investment is expected to yield; an asset's risk premium is a form of compensation for investors who tolerate the extra risk, compared to that of a risk-free asset, in a given investment. When the outstanding market debts are at a risky position over the debt that has been issued in the countries with a strong and sound economy will make the premium positive. When the premium of 12.6% os considered high, it is not an absolute assessment. For example, the distressed debt may be having premiums more than 12.6%. The returns that are sought by the private equity investors require a high return rate. contrary, the investment-grade investments have the marginal premium and lower than 12.6%.

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