Question

Use the following table: Series Average return Large stocks 11.96 % Small stocks 16.66 Long-term corporate bonds 6.33 Long-term government bonds 6.10 U.S. Treasury bills 3.93 Inflation 3.10

a. Determine the return on a portfolio that was equally invested in large-company stocks and long-term corporate bonds. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

b. What was the return on a portfolio that was equally invested in small stocks and Treasury bills? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

The following are the average returns given in the question:

Series	Average Retuns
Large stocks	11.96%
Small stocks	16.66%
Long-term corporate bonds	6.33%
Long-term government bonds	6.10%
Treasury bills	3.93%
Inflation	3.10%

a) The return on a portfolio that was equally invested in large-company stocks and long-term corporate bonds is:

Return = (11.96% + 6.33%)/2 = 9.15%

Inflation adjusted returns = [(1+9.15%)/(1+3.10%)]-1 = 5.87%

b) The return on a portfolio that was equally invested in small stocks and Treasury bills is:

Return = (16.66% + 3.93%)/2 = 10.30%

Inflation adjusted returns = [(1+10.3%)/(1+3.10%)]-1 = 6.98%