Over the Past Ten Years, Large-Company Stocks Have Returned an Average

question 58

Multiple Choice

Over the past ten years, large-company stocks have returned an average of 8.7 percent annually, long-term corporate bonds have earned 4.1 percent annually, and U.S. Treasury bills have returned 2.5 percent annually. How much additional risk premium would you have earned if you had invested in large-company stocks rather than long-term corporate bonds over those ten years?

• A)1.7%
• B)3.7%
• C)4.2%
• D)4.6%
• E)6.4%

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Definitions:

Payback Method

A simplistic financial analysis tool used to determine the time required for the earnings from an investment to repay the initial investment cost.

NPV Profile

A graphical representation showing the relationship between the net present value (NPV) of a project and various discount rates, helping to analyze the investment's sensitivity to changes in cost of capital.

MIRR

Modified Internal Rate of Return, a financial metric used to assess the profitability of investments, adjusting for different cash inflow and outflow timings.

IRR Method

A financial analysis tool used to evaluate the profitability of investments based on the internal rate of return, which calculates the rate at which the net present value of all cash flows is zero.