Average Annual Rates T-Bills 3.46 1.04 4.45 T-Bills 3.12 1.29 3.11 Standard Devi

Question

Average Annual Rates T-Bills 3.46 1.04 4.45 T-Bills 3.12 1.29 3.11 Standard Deviation Inflation 4.07 5.95 2.89 InflationReal T-Bill Real T-Bill All months First half Recent half 1.95 1.68 3.53 0.56 0.29 0.90 3.81 6.27 2.13 (1926-2016) Mean excess return (annualized) Standard deviation (annualized) Market Index 0.83 18.64 Big/ Growth 7.98 18.50 Big/ Value 11.67 24.62 Small/ Growth 8.79 26.21 Small/ Value 15.56 28.36 Suppose that the inflation rate is expected to be 1.95% in the near future using the data provided above, what would be your predictions for the following? (Round your answers to 2 decimal places.) a. The T-bill rate? b. The expected rate of return on the Big/Value portfolio? C. The risk premium on the stock market?

Explanation / Answer

The T-bill rate:

The average Real T-Bill Rate = 0.56%

Inflation = 1.95%

T-bill rate = 0.56 + 1.95 = 2.51%

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