# Question

Refer to Table 10.1 in the text and look at the period from 1973 through 1980.

a. Calculate the average return for Treasury bills and the average annual inflation rate (consumer price index) for this period.

b. Calculate the standard deviation of Treasury bill returns and inflation over this time period.

c. Calculate the real return for each year. What is the average real return for Treasury bills?

d. Many people consider Treasury bills to be risk-free. What do these calculations tell you about the potential risks of Treasury bills?

Table 10.1

a. Calculate the average return for Treasury bills and the average annual inflation rate (consumer price index) for this period.

b. Calculate the standard deviation of Treasury bill returns and inflation over this time period.

c. Calculate the real return for each year. What is the average real return for Treasury bills?

d. Many people consider Treasury bills to be risk-free. What do these calculations tell you about the potential risks of Treasury bills?

Table 10.1

## Answer to relevant Questions

In the previous problem, what is the probability that the return is less than –100 percent? (Think.) What are the implications for the distribution of returns? Is the following statement true of false? A risky security cannot have an expected return that is less than the risk-free rate because no risk-averse investor would be willing to hold this asset in equilibrium. Explain. You want to create a portfolio equally as risky as the market, and you have $1,000,000 to invest. Given this information, fill in the rest of the following table: Suppose you observe the following situation: Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market? What is the risk-free rate? Consider the following information: a. Your portfolio is invested 40 percent each in A and C, and 20 percent in B. What is the expected return of the portfolio? b. What is the variance of this portfolio? The standard ...Post your question

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