In Figure 6-2, which rate of return is the risk-free rate? Why? FIGURE 6-2 Historical Rates of

In Figure 6-2, which rate of return is the risk-free rate? Why?

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FIGURE 6-2 Historical Rates of Return Securities Small- company stocks Large- company stocks Intermediate-term government bonds Corporate bonds U.S. Treasury bills Inflation Nominal Average Annual Returns 16.7% 6.3% 12.1% 20.1% 6.1% 3.5% Standard Deviation of Returns 2.9% 32.1% 5.6% 8.4% 3.1% 4.1% Real Average Annual Returnsa 13.8% 9.2% 3.4% 3.2% 0.6% Risk Premiumb 13.2% 8.6% 2.8% 2.6% 0.0% *The real return equals the nominal returns less the Inflation rate of 2.9 percent. The risk premium equals the nominal security return less the average risk-free rate (Treasury bills) of 3.5 percent.