3)A historical average return of small cap stocks is 17.4% and average return of large cap stocks is 12.3%, with standard deviation at 35% and 20% respectively. The historical risk free rate is 3.8%.

a)Explain the concept of risk premium.

b)What are the risk premiums for the small cap and large cap stocks?

c)Using the concept of standard deviation, explain why small company stocks have higher risk premium over large company stocks.