Based on the past 88 years, the inflation rate averaged 3.0 percent and the U. S. Treasury bill yield was 3.5 percent, and the historical risk premium on small-company stocks was 13.2 percent. If these averages hold, what nominal rate of return should you expect to earn on small-company stocks over the next several years?

16.7 percent

Explanation:

In the past 88 years, the inflation rate averaged 3.0 percent

The U.S. treasury bill yield was 3.5 percent

The historical yield premium on small company stocks was 13.2 percent

Therefore, the nominal rate of return can be calculated as follows

Nominal return on small company stock= Treasury bill yield+ Historical yield premium

= 3.5%+13.2%

= 16.7%

Hence the nominal return on small company stocks over the next srvetsl years is 16.7 percent.

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