The following data shows the rate of return on stocks and bonds for several recent years. Calculate the risk premium on equities vs. bonds each year and then calculate the average risk premium. Do you think, at the beginning of 2002, investors expected the outcomes we observe in this table?
|
Year
|
2002
|
2003
|
2004
|
2005
|
|
Return on stocks (%)
|
-20.9
|
31.6
|
12.5
|
6.4
|
|
Return on bonds (%)
|
17.8
|
1.4
|
8.5
|
7.8
|
|
Risk premium (%)
|
|
|
|
|