Question

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. |

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. |

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? |

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? |

Standard deviation | % |

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%.

Problem 10-8 Risk Premiums [LO 2]
Consider the following table for a period of six
years:
Returns
Year
Large-Company Stocks
U.S. Treasury Bills
1
–15.99
%
7.55
%
2
–26.86
8.12
3
37.49
6.13
4
24.19
6.37
5
–7.68
5.58
6
6.83
8.03
Calculate the arithmetic average returns for large-company stocks
and T-bills over this time period. (Do not round
intermediate calculations and enter your answers as a percent
rounded to 2 decimal places, e.g., 32.16.)
Arithmetic
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Suppose we have the following Treasury bill returns and
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Year
Treasury Bills
Inflation
1
10.45%
12.55%
2
11.36
16.00
3
9.06
10.29
4
8.34
7.97
5
8.88
10.29
6
11.23
12.77
7
14.11
16.98
8
15.97
16.90
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