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Unformatted text preview: ry bills. As U.S. Treasury bill has short maturity and
there is no risk of default, short-term government debt can be considered risk-free. Investors in common
stocks have earned a risk premium of 7.0 percent (10.1 - 4.1 percent.). Thus, on average investors in
common stocks have historically been compensated with a 7.0 percent higher return per year for taking on
the risk of common stocks.
Table 1: Average nominal compounded returns,
standard deviation and risk premium on U.S. securities, 1900-2000.
Annual return Std. variation Risk premium U.S. Treasury Bills 4.1% 4.7% 0.0% U.S. Government Bonds 4.8% 10.0% 0.7% U.S. Common Stocks 10.1% 20.2% 7.0% Source: E. Dimson, P.R. Mash, and M Stauton, Triumph of the Optimists: 101 Years of
Investment returns, Princeton University Press, 2002. Across countries the historical risk premium varies significantly. In Denmark the average risk premium
was only 4.3 percent compared to 10.7 percent in Italy. Some of these differences across countries may
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This note was uploaded on 10/26/2012 for the course 19 19 taught by Professor - during the Spring '12 term at Sunway University College.
- Spring '12