Consider the following table for a period of six years: Calculate the arithmetic
ID: 2784643 • 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 and enter your answers as a percent 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 and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
Calculate the observed risk premium in each year for the large-company stocks versus the T-bills.
a. What was the arithmetic average risk premium over this period? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Average risk premium %
b. What was the standard deviation of the risk premium over this period? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Risk premium standard deviation %
Explanation / Answer
Year Large-Company Stocks U.S. Treasury Bills 1 (14.79) 7.31 2 (26.50) 8.00 3 37.25 5.89 4 23.95 5.17 5 (7.20) 5.46 6 6.59 7.67 Average return= Sum of 6 year returns/no of years i.e.6 Average return-Large cap 3.22 % Average return-US treasury bill 6.58 % Large cap stocks L Treasury bill T Year Large-Company Stocks=L U.S. Treasury Bills=T D1=L-average large cap return D2=T-average T bill return D1^2 D2^2 1 (14.79) 7.31 (18.01) 0.73 324.24 0.53 2 (26.50) 8.00 (29.72) 1.42 883.08 2.01 3 37.25 5.89 34.03 (0.69) 1,158.27 0.48 4 23.95 5.17 20.73 (1.41) 429.87 2.00 5 (7.20) 5.46 (10.42) (1.12) 108.51 1.26 6 6.59 7.67 3.37 1.09 11.38 1.18 2,915.35 7.46 Average return-Large cap 3.22 Average return-US treasury bill 6.58 Variance-L 2,915.35 Variance-T 7.46 Standard Deviation-L 53.99 % Standard Deviation-T 2.73 % Year Large-Company Stocks=L U.S. Treasury Bills=T Risk premium=L-T D=Risk premium-Average risk D^2 1 (14.79) 7.31 (22.10) (18.73) 350.94 2 (26.50) 8.00 (34.50) (31.13) 969.28 3 37.25 5.89 31.36 34.73 1,205.94 4 23.95 5.17 18.78 22.15 490.47 5 (7.20) 5.46 (12.66) (9.29) 86.37 6 6.59 7.67 (1.08) 2.29 5.23 3,108.23 Average risk premium (3.37) Variance of risk premium 3,108.23 Standard deviation 55.75