Question

Assume these are the stock market and Treasury bill returns for a 5-year period:

Year Stock Market Return (%) T-Bill Return (%)

2011 −32.93 5.10

2012    32.80 1.40

2013    13.56 0.32

2014 4.98    0.09

2015 20.76 0.11

a. What was the risk premium on common stock in each year?  (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

b. What was the average risk premium? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

c. What was the standard deviation of the risk premium? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Answer 1

a). Risk Premium = rS - rF

2011 : -32.93% - 5.10% = -38.03%

2012: 32.80% - 1.40% = 31.40%

2013: 13.56% - 0.32% = 13.24%

2014: 4.98% - 0.09% = 4.89%

2015: 20.76% - 0.11% = 20.65%

b). Average Risk Premium = [RPi] / n

= [-38.03% + 31.40% + 13.24% + 4.89% + 20.65%] / 5

= 32.15% / 5 = 6.43%

c). _RP = [{(E(RPi) - RPi)²} / (n - 1)]^1/2

= [{(6.43% + 38.03%)² + (6.43% - 31.40%)² + (6.43% - 13.24%)² + (6.43% - 4.89%)² +

  (6.43% - 20.65%)²} / (5 - 1)]^1/2

= [{1,976.69%² + 623.50%² + 46.38%² + 2.37%² + 202.21%²} / 4]^0.5

= [2,851.15%² / 4]^0.5 = [712.79%²]^0.5 = 26.70%