Suppose we have the following returns for large-company stocks and Treasury bill
ID: 2711674 • Letter: S
Question
Suppose we have the following returns for large-company stocks and Treasury bills over a six year period:
Calculate the arithmetic average returns for large-company stocks and T-bills over this period. (Do not round intermediate calculations. 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 period. (Do not round intermediate calculations. 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. What was the 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 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. What was the standard deviation of the risk premium over this period? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Year Large Company US Treasury Bill 1 3.91 5.87 2 14.35 2.51 3 19.29 3.74 4 –14.39 7.15 5 –31.88 5.34 6 37.00 5.39Explanation / Answer
Year
Large Company
US Treasury Bill
1
3.91
5.87
2
14.35
2.51
3
19.29
3.74
4
-14.39
7.15
5
-31.88
5.34
6
37
5.39
Total
28.28
30
Average Return = sum of returns/ no. of years
Large company = 28.28%/6 = 4.71%
US Treasury bill = 30/6 =5%
b)
Large company
Year
large company ( R)
R-ER
(R-ER)^2
1
3.91
-0.8
0.64
2
14.35
9.64
92.93
3
19.29
14.58
212.58
4
-14.39
-19.1
364.81
5
-31.88
-36.59
1338.83
6
37
32.29
1042.64
3052.43
Variance = (R-ER)^2/ (n-1)
= 3052.43/(6-1)
=610.49
Standard Deviation = Variance^0.50
= 610.49^0.50
= 24.71%
US Treasury Bill
Year
US Treasury Bill ( R)
R-ER
(R-ER)^2
1
5.87
0.87
0.76
2
2.51
-2.49
6.20
3
3.74
-1.26
1.59
4
7.15
2.15
4.62
5
5.34
0.34
0.12
6
5.39
0.39
0.15
13.43
Variance = (R-ER)^2/ (n-1)
= 13.43/(6-1)
=2.69
Standard Deviation = 2.69^0.50
= 1.64%
c)
Year
Large Company
US Treasury Bill
Risk Premium
1
3.91
5.87
-1.96
2
14.35
2.51
11.84
3
19.29
3.74
15.55
4
-14.39
7.15
-21.54
5
-31.88
5.34
-37.22
6
37
5.39
31.61
Total
-1.72
Average risk premium = total risk premium/n
= -1.72/6
= -0.287
D)
Year
RP
RP -ARP
(RP-ARP)^2
1
-1.96
-1.67333
2.80
2
11.84
12.12667
147.06
3
15.55
15.83667
250.80
4
-21.54
-21.2533
451.70
5
-37.22
-36.9333
1364.07
6
31.61
31.89667
1017.40
3233.83
Variance = 3233.83/(6-1)
= 646.77
Standard deviation = 646.77^0.50
=25.43
Year
Large Company
US Treasury Bill
1
3.91
5.87
2
14.35
2.51
3
19.29
3.74
4
-14.39
7.15
5
-31.88
5.34
6
37
5.39
Total
28.28
30
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.