Question

6.Assume that the returns on bonds and T-bills are normally distributed. From 1957 to 2016, the average return rate for Canadian T-bills is 5.71 percent and the standard deviation is 3.81 percent. For the same period, the average return rate for Canadian long term bonds is 8.16 percent, risk premium is 2.45%, and the standard deviation is 9.63 percent.

a.In 1979, the return on bonds was -2.83 percent. How likely is it that a return this low will recur at some point in the future?

b.In 1979, the same year, T-bills had a return of 11.01 percent. How likely is it that a return on T- bills this high will recur at some point in the future?

Answer 1

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