Question
Problem 10-8 Risk Premiums [LO 2] Consider the following table for a period of six years:...
Problem 10-8 Risk Premiums [LO 2]
Consider the following table for a period of six
years:
| Returns | |||||||
| Year | Large-Company Stocks | U.S. Treasury Bills | |||||
| 1 | –15.99 | % | 7.55 | % | |||
| 2 | –26.86 | 8.12 | |||||
| 3 | 37.49 | 6.13 | |||||
| 4 | 24.19 | 6.37 | |||||
| 5 | –7.68 | 5.58 | |||||
| 6 | 6.83 | 8.03 | |||||
Calculate the arithmetic average returns for large-company stocks
and T-bills over this time period. (Do not round
intermediate calculations and enter your answers as a percent
rounded to 2 decimal places, e.g., 32.16.)
| Arithmetic average returns | |
| Large-company stock | % |
| T-bills | % |
Calculate the standard deviation of the returns for large-company
stocks and T-bills over this time period. (Do not round
intermediate calculations and enter your answers as a percent
rounded to 2 decimal places, e.g., 32.16.)
| Standard deviation | |
| Large-company stock | % |
| T-bills | % |
Calculate the observed risk premium in each year for the
large-company stocks versus the T-bills.
a. What was the arithmetic 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.)
Average risk premium
%
b. 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.)
Risk premium standard deviation
%
Homework Answers
Answer #1
Arithmetic average returns:
Large stock = (-15.99-26.86+37.49+24.19+6.83-7.68)/6 = 2.99%
Treasury = (7.55+8.12+6.13+6.37+5.58+8.03)/6 = 6.96%
Standard deviation of returns:
Large stock = 54.95%
Treasury = 2.4%
a) Average risk premium = 2.99-6.96 = -3.97%
b) Risk premium std deviation = 54.95-2.4 = 52.55%
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