Suppose we have the following returns for large-company stocks and Treasury bill

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 3.96 4.50

2 14.12 4.88

3 19.01 3.80

4 14.67 6.96

5 32.16 4.88

6 37.26 6.14

a. Calculate the arithmetic average returns for large-company stocks and T-bills over this period. (Round your answers to 2 decimal places. (e.g., 32.16))

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.(Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))

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? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

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? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Standard deviation %

Explanation / Answer

(a) Arithmetic average

(b) Standard deviation (SD) = Square root of Variance

(c)

LARGE COMPANY STOCKS Year Return 1 3.96 2 14.12 3 19.01 4 14.67 5 32.16 6 37.26 SUM: % (A) 121.18 AVERAGE: % (B)=(A)/6 20.20 T-BILLS Year Return 1 4.5 2 4.88 3 3.8 4 6.96 5 4.88 6 6.14 SUM: % (A) 31.16 AVERAGE: % (B)=(A)/6 5.19

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