Suppose we have the following returns for large-company stocks and Treasury bill
ID: 2766981 • 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. (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
c1 &2. 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 3.66% 4.66% -1.00% 0.0001214 2 14.44% 2.33% 12.11% 0.0144199 3 19.03% 4.12% 14.91% 0.0219286 4 -14.65% 5.88% -20.53% 0.0425667 5 -32.14% 4.90% -37.04% 0.1379506 6 37.27% 6.33% 30.94% 0.0951001 Total 27.61% 28.22% -0.61% 0.312087 Average risk Free premium =-0.61%/6= -0.1017% Population Variance Risk premium =Sum of (Risk premium-Avg Risk premium)^2/6 0.05201 Population Std Deviation of risk Premium=Sq Root Of Variance= 22.81%
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