Question

Consider the following table for an eight-year period: Year WN T-bill return 7.40% 8.59 5.98 5.62 5.56 8.19 10.67 12.65 Inflation 8.60% 1223 6.83 4.97 6.59 8.91 13.18 12.41 00 O a. Calculate the average return for Treasury bills and the average annual inflation rate (consumer price index) for this period. (Do not round Intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) b. Calculate the standard deviation of Treasury bill returns and inflation over this time period. (Do not round Intermediate calculations and enter your answers as e percent rounded to 2 decimal places, e.g., 32.16.) c. Calculate the real return for each year. (A negatlve answer should be Indicated by a minus sign. Leave no cells blank.be certain to enter "0" wherever required. Do not round Intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) d. What is the average real retum for Treasury bills? (A negative answer should be Indicated by a minus sign. Do not round Intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a. Treasury bills Inflation rate Treasury bills Inflation rate Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Average real return d.

Answer 1

Year Inflation DT=T-T DI=I-I DI (1) D T-Bill return (T) 7.4 2 8.59 8.6 12.23 12.23 6.83 4.97 6.59 .91 13.18 12.41 73.72 5.98 5.62 5.56 8.19 10.67 12.65 64.66 -0.6825 0.5075 -2.1025 -2.4625 -2.5225 0.1075 2.5875 4.5675 -0.615 0.465806 0.378225 3.015 0.257556 9.090225 -2.385 4.420506 5.688225 -4.245 6.063906 18.02003 -2.625 6.363006 6.890625 -0.305 0.011556 0.093025 3.965 6.695156 15.72123 3.195 20.86206 10.20803 45.13955 66.0896 6 8 8 Total

Total return a. Average return of T-Bill (T) = No.of years 64.66 8 Total return Average return of Inflation (1) = No.of years 73.72 -= 9.21% 8 b. Deviation of T-Bill = DI= T-Bill return (T) – Average T-Bill return (T) Deviation of Inflation =D = Inflation (I) - Average Inflation (I) D 45.1395 = 5.6424 Variance of T-Bill (VT) = " No.of years 8 D _66.0896 = 8.2612 Variance of Inflation (V1) = * No.of years 8 Standard Deviation T-Bill = V1 = V5.6424 = 2.37% Standard Deviation Inflation = /V = V8.2612 = 2.87%

c. Real rate of return=- 1+ nominal rate (T-Bill return) 1+ Inflation rate

Year Inflation (I) T-Bill return (T) 7.4 Real return (RI) -1.10497 8.6 8.59 12.23 -3.24334 5.98 6.83 -0.79566 5.62 4.97 0.619225 5.56 6.59 -0.96632 8.19 8.91 -0.6611 7 10.67 13.18 -2.21771 12.65 12.41 0.0213504 Total 64.66 73.72 -8.15636 d. Average real return of T-Bill = Total return _ -8.1563_ = -1.02% No.of years 8