Question

Suppose we have the following returns for large-company stocks and Treasury bills over a six-year period: Year 1 2 3 Large Company US Treasury Bill 4.00% 4.62% 14.49 4.96 19.33 3.88 -14.35 7.00 -31.84 5.38 37.04 6.43 5 a. 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 a percent rounded to 2 decimal places, e.g., 32.16.) b. 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 a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

returns deviation 2 deviation 2 year 1 2 Large stock 4.00% 14.49% 19.33% -14.35% -31.84% 37.04% 4.78% Large stock deviation (returns-average) -0.78% 9.71% 14.55% - 19.13% -36.62% 32.26% variance = T-Bill 4.62% 4.96% 3.88% 7.00% 5.38% 6.43% 5.38% 3 T-bill deviation (returns-average) -0.76% -0.42% -1.50% 1.62% 0.00% 1.05% variance = 0.0061% 0.9432% 2.1175% 3.6589% 13.4090% 10.4082% 0.06109 4 0.0058% 0.0018% 0.0225% 0.0263% 0.0000% 0.0111% 0.00013 5 6 average return standard deviation = variance 10.5 24.72% standard deviation = 1.16% deviation^2 year 1 2 3 risk premium (large stock return - T-bill) -0.62% 9.53% 15.45% -21.35% -37.22% 30.61% -0.60% deviation (risk premium-average) -0.02% 10.13% 16.05% -20.75% -36.62% 31.21% variance = 0.0000% 1.0262% 2.5760% 4.3056% 13.4102% 9.7406% 4 5 6 average risk premium 0.06212 standard deviation = variance 0.5 24.92% Activate Windows

Requirement: a) Large-company stock T-bills Average returns 4.78% 5.38% b) Large-company stock T-bills Standard deviation 24.72% 1.16% C-1) Average risk premium -0.60% C-2) Risk premium std deviation 24.92%