Rates of return on U.S. stock, bond, and bill indexes are available to download for free at pages. stern.nyu.edu/-adamodar. Click on “Updated Data” and look for “Historical Returns on Stocks, Bonds and Bills-US” and download the spreadsheet. Calculate the average market risk premium for the NYSE stocks, using the Treasury bill as the risk-free security for successive 10-year periods and for the entire period. Repeat, using the long-term government bond as the risk-free security.
a. Is the overall market risk premium bigger or smaller when the risk-free security is the Treasury bill or the long-term government bond?
b. Compare the risk premiums over time. Do you think the results suggest that the risk premium may have been changing? Explain.