Assume these are the stock market and Treasury bill returns for a 5-year period
ID: 2658266 • Letter: A
Question
Assume these are the stock market and Treasury bill returns for a 5-year period Stock Market T-Bill Return Year 2011 2012 2013 2014 2015 Return (%) 0.98 16.06 33.86 12.71 0.67 0.03 0.05 0.07 0.85 a. What was the risk premlum on common stock In each year? (Do not round Intermedlete calculatlo answers as a percent rounded to 2 declmal places.) Answer is complete and correct. Year 2011 2012 2013 2014 2015 Risk Premium 0.95 % 16.01 % 32.99 | % 12.66?196 0.46 % b. What was the average risk premium? (Do not round Intermedlete calculetlons. Enter your answe rounded to 2 declmal places.) Answer is complete and correct. Average risk 12.61?96 um c. What was the standard devlation of the risk premium? (lgnore that the estimation is from a sample not round Intermedlate calculetions. Enter your answer as a percent rounded to 2 declmal pleces Standard deviationExplanation / Answer
Year
Return
(Return - Average) ^2
2011
0.95%
1.36048896%
2012
16.01%
0.11532816%
2013
32.99%
4.15181376%
2014
12.66%
0.00002116%
2015
0.46%
1.47719716%
Total / Sum =
63.070000%
7.10484920%
Average = X = Total / n
X = 63.07%/5 = 12.614%
X = 12.61% (rounded to two decimal places)
We will use Average = 12.614% for calculating “(Return - Average)^2 at each year in last column of table above.
Now,
Standard Deviation = ((Sum of (Return - Average) ^2)/n) ^0.5
Standard Deviation =(7.10484920%/5)^0.5
Standard Deviation = 0.11920444
Standard Deviation of risk premium = 11.92%
Year
Return
(Return - Average) ^2
2011
0.95%
1.36048896%
2012
16.01%
0.11532816%
2013
32.99%
4.15181376%
2014
12.66%
0.00002116%
2015
0.46%
1.47719716%
Total / Sum =
63.070000%
7.10484920%