3.Recalling the definitions of risk premiums from Chapter 8 and using the Treasu

Question

3.Recalling the definitions of risk premiums from Chapter 8 and using the Treasury bill return in Table 12.4 as an approximation to the nominal risk-free rate, what is the risk premium from investing in each of the other asset classes listed in Table 12.4? 4.What is the real, or after-inflation, return from each of the asset classes listed in Table 12.4? here is table Table 12.4 - Historical Returns and Standard Deviation of Returns from Different Assets, 1928-2008: Annual Average Return - Treasury Bills (3.8%), Treasury Bonds (5.4%), Stocks (11.1%), Inflation Rate (3.2%) Standard Deviation - Treasury Bills (3.0%), Treasury Bonds (7.6%), Stocks (20.4%), Inflation Rate (4.0%)

Explanation / Answer

3.

treasury bill rate = rf = risk free rate = 3.8%

therefore risk premium in investing Treasury bonds = 5.4-3.8 = 1.6%

risk premium in investing in Stocks = 11.1-3.8 = 7.3%

4.

real return from treasury bill = 3.8%

real return from Treasury bonds = 5.4%

real return from Stocks = 11.1%

after inflation return from treasury bill = 3.8+3.2 = 7%

after inflation return from Treasury bonds = 5.4 + 3.2 = 8.6%

after inflation return from Stocks = 11.1+3.2 = 14.3%

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