Question

Year	Large Stocks	LT Gov Bonds	US T-bills	CPI
			(Risk-free)	(Inflation)
1946	-8.18%	4.07%	0.38%	18.13%
1947	5.24%	-1.15%	0.62%	8.84%
1948	5.10%	2.10%	1.06%	2.99%
1950	18.06%	7.02%	1.12%	-2.07%
1951	30.58%	-1.44%	1.22%	5.93%

a) Calculate the average real risk premium earned on large-company stocks. (Enter percentages as decimals and round to 4 decimals)

b) Calculate the average risk premium earned on US T-bills. (Enter percentages as decimals and round to 4 decimals)

Answer 1

Real rate of return = (1+Nominal rate)/(1+Inflation rate) - 1 a. Large Stocks is nominal rate b. UST Bill is nominal rate a b LT GOV Large Stocks -0.0818 Large Stocks T Bill 1946 UST Bill CPI (Inflation) 0.0038 0.1813 0.0062 0.0884 -0.2227 0.0407 -0.0115 -0.1503 0.0524 -0.0331 0.0510 0.021 0.0106 0.0299 1947 1948 1950 1951 -0.0755 -0.0187 0.0326 -0.0445 0.0112 -0.0207 0.1806 0.3058 0.0205 0.2056 0.2327 0.0702 -0.0144 0.0122 0.0593 -0.2564 Total No of returns Average real rate of returns 5 0.2029 5 0.0406 4.06% -0.0513 -5.13%

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