Over the past 10 years, large-company shares have returned 11.2%. The risk premium on these shares was 4.8% and the inflation rate was 3.7%. What was the risk-free rate of return?

 

Risk-Free Rate of Return ={(1+Company Rate of Return)/(1+Inflation Rate)} -1

Of the 11.2% Share Return, 4.8% was Risk Premium

11.2%-4.8% =6.4%

={(1+6.4)/(1+3.7)} -1

={(7.4)/(4.7)} -1

={1.574468} -1

=0.5957%

Step-by-step explanation

The 4.8% risk premium cannot be added to the 11.2% Share Return because the question says that the large-company shares have returned 11.2%. If we decide to add the 4.8% risk premium to the 11.2% Share Return, it will mean that the large-company shares have returned 16%, which is not the case.