Question
Suppose we have the following returns for large-company stocks and Treasury bills over a six year...
|
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 | % |
| b. |
Calculate the standard deviation of the 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.) |
| Standard deviation | |
| Large company stocks | % |
| T-bills | % |
| c-1 |
Calculate the observed risk premium in each year for the large-company stocks versus the T-bills. What was the average risk premium over this period? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
| Average risk premium | % |
| c-2 |
Calculate the observed risk premium in each year for the large-company stocks versus the T-bills. What was the standard deviation of the risk premium over this period? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
| Standard deviation | % |
Homework Answers
Answer #1
Risk premium is calculated by following formula:
Risk premium = large-company stocks - T bill rate
Arithmatic average and standard deviation of Large company stock and T bill and risk premium is calculated in excel and screen shot provided below:
a.
Arithmatic average of Large company stock is 4.60% and Arithmatic average of T bill is 4.69%.
b.
Standard deviation of Large company stock is 24.87% and Standard deviation of T bill is 1.39%.
c-1
Average risk premium is -0.09%
C-2
Standard deviation of risk premium is 25.01%.
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