P6-19. He re are the nominal returns on stocks, bonds, and bills for the 1920s a

Question

P6-19. He re are the nominal returns on stocks, bonds, and bills for the 1920s and 1930s. For each decade. calculate the standard deviation of returns for each asset class. How do those figures compare with the more recent numbers for stocks presented in Table 6.3 and the long-run figures for all three asset types in Table 6.4? Nominal Returns (%) on Stocks, Bonds, and Bills 1920s Stocks Bonds 1930s Bills Bills 7.6 7.0 Stocks -28.3 43.9 -9.8 Bonds 1920 1921 1922 1923 1924 925 2.4 5.8 116 127 0.6 35 3.0 57 270 64 28.3 5.7 95 78 33.1 89 1930 4.7 1931 439 53 -5.3 47 1932 98 16.8 5.2193357.60. 10.0 5.0 7.5 0.2 1.0 0.3 0.2 0.2 0.2 0.3 0.0 0.0 934 4.4 935 44.0 3.3 193632.3 937-34.6 938 28.2 2.9 4.I 1926 927 1928 38.70. 3.6 4.7 929-145 3.4 1939 Source: Dimson, Elroy, Triumph of the Opoimists 2002 Elroy Dimson, Paul Marsh, and Mike Staunton. Published by Princeton University Press. Reprinted by permission of Princeton University Press

Explanation / Answer

Here Now it is better to invest in the Bills as it has the lower standard deviation which means the lower risk  

but if youu want more return and has a capability to take risk then invest in stock  

Normal Returns Year Stocks(Xi) (Xi-z) (Xi-z)2 Bonds (Yi) (Yi-z) (Yi-z)2 Bills(ki) (ki-z) (ki-z)2 1920 -17.9 -28.01 784.560 5.8 0.31 0.096 7.6 4.945 24.453 1921 11.6 1.49 2.220 12.7 7.21 51.984 7 4.345 18.879 1922 30.6 20.49 419.840 3.5 -1.99 3.960 4.7 2.045 4.182 1923 3 -7.11 50.552 5.7 0.21 0.044 5.2 2.545 6.477 1924 27 16.89 285.272 6.4 0.91 0.828 4.1 1.445 2.088 1925 28.3 18.19 330.876 5.7 0.21 0.044 4.1 1.445 2.088 1926 9.5 -0.61 0.372 7.8 2.31 5.336 3.3 0.645 0.416 1927 33.1 22.99 528.540 8.9 3.41 11.628 3.1 0.445 0.198 1928 38.7 28.59 817.388 0.1 -5.39 29.052 3.6 0.945 0.893 1929 -14.5 -24.61 605.652 3.4 -2.09 4.368 4.7 2.045 4.182 1930 -28.3 -38.41 1475.328 4.7 -0.79 0.624 2.4 -0.255 0.065 1931 -43.9 -54.01 2917.080 -5.3 -10.79 116.424 1.1 -1.555 2.418 1932 -9.8 -19.91 396.408 16.8 11.31 127.916 1 -1.655 2.739 1933 57.6 47.49 2255.300 -0.1 -5.59 31.248 0.3 -2.355 5.546 1934 4.4 -5.71 32.604 10 4.51 20.340 0.2 -2.455 6.027 1935 44 33.89 1148.532 5 -0.49 0.240 0.2 -2.455 6.027 1936 32.3 22.19 492.396 7.5 2.01 4.040 0.2 -2.455 6.027 1937 -34.6 -44.71 1998.984 0.2 -5.29 27.984 0.3 -2.355 5.546 1938 28.2 18.09 327.248 5.5 0.01 0.000 0 -2.655 7.049 1939 2.9 -7.21 51.984 5.5 0.01 0.000 0 -2.655 7.049 Total return 202.2 14921.138 109.8 436.158 53.1 112.350 No. of years 20 20 20 n-1 19 19 19 Average mean (Z) 10.11 5.49 2.655 Variance 14921.38/19 = 785.3230526 436.158/19 = 22.95568 112.350/19 = 5.913158 Standard deviation 28.02 4.79 2.43

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