Question

Based on the Ibbotson data, which of the following has the highest risk premium? a. Large-company...

Based on the Ibbotson data, which of the following has the highest risk premium?

a.

Large-company stocks
b.

Small-company stocks
c.

US. Treasury Bonds
d.

Corporate Bonds
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Answer #1

The correct answer is Option B(Small Company Stocks).

Small company stocks have the highest risk premium. This is due to the fact that small company have limited access to resources They have a high amount of volatility and risk. They are more prone to risks of unexpected events. Sometimes, Returns in small stock companies surpass the returns in large stock companies. This is due to their risky nature. That is why large company stocks are considered a safer bet. Treasury Bonds are risk-free instruments which provide assured returns. Corporate Bonds are riskier than Treasury Bonds but they have less risk premium as compared to small stock companies. Due to the volatile nature and limited resources in small companies, the risk premium is the highest.

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