Question

un wN II newconnect.mneuUcatn.cu IOR IICCL HW ch 12 Saved Не 5 Suppose we have the following returns for large-company stocks and Treasury bills over a six-year period: Large Company 3.92 % US Treasury Bill 5.90% 2.53 3.76 Year 10 2 14.18 19.37 -14.31 -31.80 37.08 polnts 3 4 716 51 5.42 eBook 6 6.24 Hint Print Calculate the arithmetic average returns for large-company stocks and T-bills over this period. (Do not round intermediate calculations and enter your answers as percent rounded to 2 decimal places, e.g, 32.16.) b. a. References Calculate the standard deviation of the returns for large-company stocks and T-bills over this period. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) c-1. Calculate the observed risk premium in each year for the large-company stocks versus the T-bills. What was the average risk premium over this period? (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.) c-2. Calculate the observed risk premium in each year for the large-company stocks versus the T-bills. What was the standard deviation of the risk premium over this period? (Do not round intermediate calculations and enter your answer as o Mc Graw Hill tducain < Prev 5 of 6 Next>

Answer 1

Answer a and b:

Large Company US Treasury Bill Arithmatic Average 4.74% 5.17% а Standard Deviation = 24.69% 1.71% b

Working:

Large Company US Treasury Bill Year 3.92% 5.90% 14.18% 2.53% 2 19.37% 3.76% 3 -14.31% 7.16% 4 -31.80% 5.42% 5 37.08% 6.24% 6 Arithmatic Average 4.74% 5.17% a Standard Deviation 24.69% 1.71% LO

The above excel with 'show formula' is as follows:

A. Е Large Company US Treasury Bill 1 Year 0.059 2 0.0392 0.0253 2 0.1418 0.1937 0.0376 3 -0.1431 0.0716 5 -0.318 0.0542 6 5 0.0624 0.3708 7 б Arithmatic Average AVERAGE(C2:C7) -AVERAGE(D2:D7) 10 а 11 Standard Deviation |-STDEV(C2:C7) -STDEV(D2:D7) 12 b 13 N st

Answer c1 and c2:

We calculate below observed risk premium in each year, average risk premium and standard deviation of risk premium:

Large Company (L) US Treasury Bill (T) Risk Premium (L- T) Year 3.92% 5.90% -1.98% 1 2.53% 14.18% 11.65% 2 19.37% 3.76% 15.61% -14.31% 7.16% -21.47% -31.80% 5.42% -37.22% 5 37.08% 6.24% 30.84% 6 Risk Premium Arithmatic Average -0.43% c1 25.22% Standard Deviation = c2.

The above excel with 'show formula' is as follows:

A. В C D E Year Large Company (L) US Treasury Bill (T) Risk Premium (L-T) 1 0.0392 0.059 -B2- C2 2 1 0.0253 0.1418 3 2 ЕВЗ-СЗ 0.1937 -B4-C4 0.0376 4 3 -B5-C5 -0.1431 0.0716 5 4 0.0542 -0.318 6 5 B6-C6 0.3708 0.0624 7 6 ЕB7-C7 Risk Premium |=AVERAGE(D2:D7) Arithmatic Average= 10 с1 11 =STDEV(D2:D7) Standard Deviation = 12 c2. 13 14 on