The following table shows the annual realized returns on the following U.S. securities from 1994 to 2007: the stock market (S&P 500), corporate bonds, government bonds, and Treasury bills. The annual inflation rate for each period is shown in the last column.

a. Theory suggests that the riskier the investment, the higher the expected return. To what extent is that illustrated by the data in the table?

b. How do you explain the relatively high volatility in the annual returns on both corporate and government long-term bonds?

c. What was the market risk premium of the S&P 500 for each of the years from 1994 to 2007? What was it over the two periods 1994–2007 and 1926–2007?

What conclusions can you draw from your observations?

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