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: 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)) 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)) 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)) 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))

Explanation / Answer

Year   Return Large cos Rs Return T Bills Rt (Rs-Average return Large co stock)^2 (Rs-Average Retun T Bill)^2                                                    1 3.90% 5.84%       0.0000757       0.0000490                                                    2 14.47% 2.49%       0.0094090       0.0007023                                                    3 19.21% 3.72%       0.0208514       0.0002016                                                    4 -14.47% 7.14%       0.0370178       0.0004000                                                    5 -31.96% 5.26%       0.1349093       0.0000014                                                    6 37.45% 6.39%       0.1067982       0.0001563 Total   28.60% 30.84%            0.30906            0.00151 a Arithmatic Average Return= 4.77% 5.14% b Population Variance = Sum of (return-Avg return)^2/6.            0.05151            0.00025 Population Standard Deviation=Sq root Variance 22.70% 1.59% c1 Assuming T bill as risk free rate . Year   Return Large cos Rs Return T Bills Rt Risk Premium = Return Large stock-Risk free return (Risk premium -Average risk premium )^2                                                    1 3.90% 5.84% -1.94%       0.0005351                                                    2 14.47% 2.49% 11.98%       0.0134715                                                    3 19.21% 3.72% 15.49%       0.0228515                                                    4 -14.47% 7.14% -21.61%       0.0483265                                                    5 -31.96% 5.26% -37.22%       0.1413256                                                    6 37.45% 6.39% 31.06%       0.0941674 Total   28.60% 30.84% -2.24%          0.320678 Average risk Free premium = -0.3733% Population Variance Risk premium =Sum of (Risk premium-Avg Risk premium)^2/6           0.05345 Population Std Deviation of risk Premium=Sq Root Of Variance= 23.12%

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