Suppose we have the following Treasury bill returns and inflation rates over an
ID: 2660626 • Letter: S
Question
Suppose we have the following Treasury bill returns and inflation rates over an eight year period:
Calculate the average return for Treasury bills and the average annual inflation rate (consumer price index) for this period. (Round your answers to 2 decimal places. (e.g., 32.16))
Calculate the standard deviation of Treasury bill returns and inflation over this period. (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))
What was the average real return for Treasury bills over this period? (Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places. (e.g., 32.16))
Suppose we have the following Treasury bill returns and inflation rates over an eight year period:
Explanation / Answer
Suppose we have the following Treasury bill returns and inflation rates over an eight year period:
Year Treasury Bills Inflation
1 10.15 12.25
2 11.05 15.67
3 8.76 9.98
4 8.05 7.69
5 8.58 9.98
6 10.92 12.45
7 13.79 16.65
8 15.63 16.55 a. Average return for treasury bills = (7.55+8.29+6.15+5.43+5.83+8.04+11+12.58)/8 = 8.11%
Average inflation = (9.02+12.69+7.24+5.2+7.1+9.44+13.72+13.05)/8 = 9.68%
b. Variance of Treasury bill return = ((7.55-8.11)^2 + (8.29-8.11)^2 + ... + (12.58-8.11)^2)/8 = 5.61
Similarly, variance of inflation = ((9.02-9.68)^2 + ...+(13.05-9.68)^2)/8 = 8.74
Std deviation = square root of variance
Std deviation of Treasury bill return = 5.61^0.5 = 2.37%
Std deviation of inflation = 8.74^0.5 = 2.96%
c. Average real return = X
(1+X)^8 * (1+inflation)^8 = (1+nominal return)^8
So (1+X)^8 * (1+9.68%)^8 = (1+8.11%)^8, so X = -1.43%
So real rate was negative, i.e. -1.43%