Question

Assume these are the stock market and Treasury bill returns for a 5-year period: Year 2011 2012 2013 2014 2015 Stock Market T-Bill Return Return (%) (%) -37.03 1.80 28.60 0.30 16.86 0.14 1.28 0.06 16.36 0.08 a. What was the risk premium on common stock in each year? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) Year 2011 2012 Risk Premium (39.10) % 28.30% 16.721% 1.22 % 16.28 % 2013 2014 2015

Answer 1

a. in 2011 =-37.03%-1.80% =-38.83%
in 2012 =28.60%-0.30% =28.30%
in 2013 =16.86%-0.14% =16.72%
in 2014 =1.28%-0.06% =1.22%
In 2015 =16.36%-0.08% =16.28%

b. Average Risk Premium =(-38.83%+28.30%+16.72%+1.22%+16.28%)/5 =4.738% or 4.74%

c. Standard Deviation =(((-38.83%-4.738%)^2+(28.30%-4.738%)^2+(16.72%-4.738%)^2+(1.22%-4.738%)^2+(16.28%-4.738%)^2)/(5-1))^0.5=26.18%