Question

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
%

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%

Suppose we have the following returns for large-company stocks
and Treasury bills over a six year period:
Year
Large
Company
US Treasury
Bill
1
3.66
4.66
2
14.44
2.33
3
19.03
4.12
4
–14.65
5.88
5
–32.14
4.90
6
37.27
6.33
a.
Calculate the arithmetic average returns for large-company
stocks and T-bills over this period. (Do not round
intermediate calculations. Enter your answers as a percent rounded
to 2 decimal places, e.g., 32.16.)
Average
returns
Large company
stocks
%
T-bills...

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