Consider the following table for a period of six years. Returns Year Large Compa
ID: 2674710 • Letter: C
Question
Consider the following table for a period of six years.
Returns
Year Large Company Stock U.S. Treasury Bills
1 -15.69% 7.49%
2 -22.778.09
3 37.436.07
4 24.13 6.07
5 -7.56 5.55
66.77 7.94
Calculate the standard deviation of the returns for large-company stocks and T-bills over this time period.
What was the arithmetic average risk premium over this period?
What was the standard deviation of the risk premium over this period?
Requirement 1: Calculate the arithmetic average returns for large-company stocks and T-bills over this time periodExplanation / Answer
1. average returns for large-company stocks = (-15.69% + -22.77%+ 37.43% +24.13% -7.56% +6.77%)/6 =3.72% average returns for T Bills = (7.49 + 8.09 +6.07+6.07+5.55+7.94)/6 = 6.87 2. standard deviation of the returns for large-company stocks =sqrt[ (-15.69%-3.72%)^2 + (-22.77%-3.72%)^2+ (37.43%-3.72%)^2 +(24.13%-3.72%)^2+ (-7.56%-3.72%)^2 +( 6.77%-3.72%)^2] = 23.53% standard deviation of the returns for T bills = sqrt[(7.49-6.87)^2 + (8.09 -6.87)^2+(6.07-6.87)^2+(6.07-6.87)^2+(5.55-6.87)^2+(7.94-6.87)^2] = 1.099% 3. Risk premium = return on large company stock - return on T bills Year Risk Premium 1 -23.18% 2 -30.86% 3 31.36% 4 18.06% 5 -13.11% 6 -1.17% a. arithmetic average risk premium = -3.15% b. Std deviation of risk premium =24.14%