Question

The following data are the returns for 1980 through 1986 on five types of capital-market instruments: common stocks, small-capitilzation stocks, long-term corporate bonds, long-term U.S. government bonds, and U.S. Treasury Bills. You may wish to use a spreadsheet program to make your calculations.

Year	Common Stock	Small Stocks	Long-term Corporate Bonds	Long-term Government Bonds	U.S. Treasury Bills
1980	0.3242	0.3988	-0.0262	-0.0395	0.1124
1981	-0.0491	0.1388	-0.0096	0.0185	0.1471
1982	0.2141	0.2801	0.4379	0.4035	0.1054
1983	0.2251	0.3967	0.0470	0.0068	0.0880
1984	0.0627	-0.0667	0.1639	0.1543	0.0985
1985	0.3216	0.2466	0.3090	0.3097	0.0772
1986	0.1847	0.0685	0.1985	0.2444	0.0616

1. What was the average return during the period for all Common Stocks?

2. Calculate the average return for Small Company Stocks

3. What was the average return during the period for Long Term Corporate Bonds?

4. What was the average return during the period for Long Term Government Bonds?

5. What was the average return during the period for US Treasury Bills?

6. Calculate the holding period return for common stocks for the 7-year holding period of 1980 through 1986.

7. Calculate the holding period return for Long Term Corporate Bonds for the 7-year holding period of 1980 through 1986

8. Calculate the holding period return for US Treasury Bills for the 7-year holding period of 1980 through 1986

9. Using the Average US Treasury Bill Rate as a proxy for the risk-free rate, what was the average risk premium for Small Company Common Stocks for the 7-year period?

10. Using the Average US Treasury Bill Rate as a proxy for the risk-free rate, what was the average risk premium for Long Term Corporate Bonds for the 7-year period?

Answer 1

There are two methods for calculating the Average returns;

1. Simple Average Return: It is the simple mathematical average of the returns of the years under analysis.

2. Compounded Average Return: It is the compounded average of the returns of the years under analysis.

3. Holding period return: It is the total return received from security.

4. Risk premium: It is the return on an investment less the return on a risk-free investment.

Here it is assumed that the face value of the all the securities is $ 100. Average Risk Premium has been calculated based on the compounded return.

I have shared the jpg file for answers. I am unable to share the excel sheet prepared by me.