Refer to Table 1.1 for large-company stock and T-bill returns for the period 19731977: a. Calculate the
Question:
a. Calculate the observed risk premium in each year for the common stocks.
b. Calculate the average returns and the average risk premium over this period.
c. Calculate the standard deviation of returns and the standard deviation of the risk premium.
d. Is it possible that the observed risk premium can be negative? Explain how this can happen and what it means.
Year-to-Year Total Returns: 1926–20 15 TABLE 1.1 LONG-TERM U.s. LONG-TERM |LARGE-COMPANY STOCKS uS GOVERNMENT US TREASURY U.S. TREASURY CONSUMER CONSUMER LARGE-COMPANY GOVERNMENT BILLS YEAR BONDS YEAR BONDS PRICEINDEX STOCKS BILLS PRICE INDEX 4.36% 1926 11.14% 8.26% 3.30% -1.12% 1971 14.30% 12.67% 3.27% 37.13% 1899% 9.15% 1927 11.15% 315% -226% 1972 4.23% 3.41% - 12.66% 1928 8.71% 43.31% -1.90% 4.05% - 1.16% 1973 -14.69% 7.29% 4.47% 7.99% 1929 -8.91% 5.41% 0.58% 1974 -26.47% -3.05% 12.34% -6.40% 5.87% 1930 -25.26% 6.08% 2.27% 1975 37.23% 4.86% 6.94% 1931 -43 86% -9.26% 1.15% -9.32% 1976 2393% 17.85% 5.07% 4.,86% 5.45% 1932 -8 85% 15.37% 088% -10.27% 1977 -7.16% 2.57% 6.70% 0.7 6% 1.52% 7.64% 1933 52.88% -0.04% 0.52% 1978 6.57% -1.61% 9.02% 10.56% 1934 -2.34% 14.16% 0.27% 1979 1861% -2.08% 13.29% 6.24% 0.17% 1935 47.22% 2.99% 1980 32.50% -4.96% 12.10% 12.52% 0.17% 1936 32.80% 9.05% 1.45% 1981 - 4.92% 0.69% 14.60% 8.92% 10.94% 1937 - 35.26% -0.69% 0.27% 2.86% 1982 21.55% 47.14% 383% 1938 -2.78% 22.56% 3.79% 3.95% 33.20% 6.96% 0.06% 1983 -1.14% 8.99% 9.90% 1939 -0.91% 6.34% 0.04% 0.00% 1984 6.27% 16.29% - 10.08% - 11.77% 0.7 1% 36.59% 7.7 1% 1940 11.88% 0.04% 1985 31.73% 3.80% 1941 -10.51% 0.14% 9.93% 1986 18.67% 30.93% 6.09% 1.10% 2.70% 0.34% -7.14% 1942 21.07% 9.03% 1987 5.25% 5.88% 4.43% 1943 25.76% 2.50% 0.38% 2.96% 1988 16.6 1% 8.75% 6.9 4% 4.42% 1944 19.69% 2.94% 0.38% 2.30% 1989 31.69% 21.30% 8.44% 4.65% 7.69% 1945 36.46% 5.69% 0.38% 2.25% 1990 -3.10% 5.66% 6.11% 0.38% 0.62% -8.18% 1946 4.41% 1813% 1991 30.47% 19.47% 5.43% 3.06% 5.24% 1947 -1.77% 884% 1992 7.62% 8.08% 348% 2.90% 3.03% 4.39% 56 1% 1948 5.10% 2.03% 1.06% 2.99% 1993 10.08% 21.53% 2.75% 2.67% 1949 18.06% 7.91% 1.12% -2.07% 1994 1.32% - 10.64% 5.93% 1950 30.58% -2.12% 1.22% 1995 37.58% 35.66% 2.54% 1.56% -2.54% 1951 24.55% -4.64% 6.00% 1996 22.96% 5.14% 3.32% 1997 1.70% 1952 18.50% 1.69% 1.75% 0.75% 33.36% 17.70% 5.19% 1953 -1.54% 0.7 5% 1.61% -1.10% 1.87% 1998 2858% 19.22% 4.86% 1954 52.40% 8.77% 0.93% -0.7 4% 1999 21.04% - 12.76% 4.8 0% 2.68% 1955 31.43% -1.63% 1.80% 0.37% 2000 -9.10% 22.16% 5.98% 3.39% 5.32% 14.23% 1956 6.63% -4.04% 2.66% 299% 2001 -11.89% 3.33% 1.55% 290% -22.10% 1.6 1% 1957 - 10 85% 5.44% 3.28% 2002 2.38% 43.34% -7.80% 1958 1.7 1% 1.76% 2003 2868% 1.51% 1.03% 1.88% 11.90% -1.81% 1.43% 1959 3.48% 1.7 3% 2004 10.88% 10.53% 3.26% 3.42% 1960 0.48% 8.04% 281% 1.36% 2005 4.91% 10.56% 330% 0.67% 15.8O% 1961 26.81% 2.94% 2.40% 2006 0.11% 4.97% 2.54% -8.78% 4.67% 1962 2.82% 1.33% 2007 5.49% 11.07% 4.52% 4.08% 2008 1.24% 1963 22.69% 1.14% 3.23% 1.64% -37.00% 41.78% 0.09% 362% 0.15% 1964 16.36% 4.45% 097% 2009 26.46% -25.61% 2.72% 7.73% 1965 12.36% 1.15% 4.06% 1.92% 2010 15.06% 0.14% 1.50% 35.75% 1966 - 10.10% -2.01% 4.94% 346% 2011 211% 0.06% 2.96% 1967 3.04% 1.74% 23.94% -7.02% 4.39% 2012 16.00% 1.80% 0.08% - 14.69% 1968 11.00% 5.36% 5.49% 4.72% 2013 32.39% 0.05% 1.50% -0.67% 6.90% 0.76% 1969 -8.47% 6.20% 20 14 13.69% 29.76% 0.03% 1970 3.94% 12.24% 6.50% 5.57% 20 15 1.38% -2.61% 0.06% 0.73%
Step by Step Answer:
Year Common stocks Tbill return Risk premium 1973 1469 729 2198 1974 2647 799 3446 1975 3723 587 313...View the full answer
Fundamentals of Investments, Valuation and Management
ISBN: 978-1259720697
8th edition
Authors: Bradford Jordan, Thomas Miller, Steve Dolvin
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Stocks (also known as equities) are securities that represent ownership in a company. They are issued by companies to raise capital, and when an individual buys stocks, they become a shareholder in that company. Investing in stocks can be a way for individuals to potentially earn a return on their investment through dividends and capital appreciation. However, investing in stocks also carries a level of risk, as the value of the stock can fluctuate based on various factors such as the financial performance of the company and general market conditions. For companies, issuing stocks can be a way to raise funds for growth and expansion. When a company goes public by issuing an initial public offering (IPO), it can raise significant capital by selling ownership stakes to the public. Companies can also issue additional stock offerings to raise additional capital as needed.
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