Consider the following table for a period of six years. Calculate the arithmetic
ID: 2715684 • Letter: C
Question
Consider the following table for a period of six years.
Calculate the arithmetic average returns for large-company stocks and T-bills over this time period. (Do not round intermediate calculations. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).)
Calculate the standard deviation of the returns for large-company stocks and T-bills over this time period. (Do not round intermediate calculations. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).)
What was the arithmetic 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 percentage rounded to 2 decimal places (e.g., 32.16).)
What was the standard deviation of the risk premium over this period? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Returns Year Large-Company Stocks U.S.Treasury Bills Year 1 – 15.89 % 7.53 % Year 2 – 26.83 8.11 Year 3 37.47 6.11 Year 4 24.17 6.27 Year 5 – 7.64 5.57 Year 6 6.81 8.00
Explanation / Answer
Standard deviation is a measure of risk that an investment will not meet the expected return in a given period. The smaller an investment's standard deviation, the less volatile (and hence risky) it is. The larger the standard deviation, the more dispersed those returns are and thus the riskier the investment is.
Large company stock T bills Year 1 -15.89% 7.53% Year 2 -26.83% 8.11% Year 3 37.47% 6.11% Year 4 24.17% 6.27% Year 5 -7.64% 5.57% Year 6 6.81% 8% Total return 18.09% 41.59% Average(total divided by 6) 3.02% 6.93%