This is an easy exercise, but doing it will make the risk premium clear to you. The risk premium for the risky mutual fund is simply the expected return on the risky mutual fund minus the safe interest rate. (Think of the safe interest rate as the Treasury bill rate.) Because one rate is subtracted from the other, the risk premium calculation will come out the same whether you use real or nominal interest rates, but to stay in the spirit of everything else we have done in the class, it is best to think of these as real interest rates.
Find the risk premium in the following cases. The answers are down below, but don’t look until you have figured them out yourself.