Question

The table below shows the difference in returns between stocks and Treasury bills and the difference between stocks and Treasury bonds at 10-year intervals.
a. At the end of 1973, the yield on Treasury bonds was 6.6% and the yield on T-bills was 7.2%. Using these figures and the historical data above from 1964-1973, construct two estimates of the expected return on equities as of December 1973.
b. At the end of 1983, the yield on Treasury bonds was 6.6% and the yield on T-bills was 7.2%. Using these figures and the historical data above from 1974-1983, construct two estimates of the expected return on equities as of December 1983.
c. At the end of 1993, the yield on Treasury bonds was 6.6% and the yield on T-bills was 2.8%. Using these figures and the historical data above from 1984-1993, construct two estimates of the expected return on equities as of December 1993.
d. At the end of 2003, the yield on Treasury bonds was 5.0% and the yield on T-bills was 1.0%. Using these figures and the historical data above from 1994-2003, construct two estimates of the expected return on equities as of December 2003.
e. What lessons do you learn from this exercise? How much do your estimates of the expected return on equities vary over time, and why do they vary?


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  • CreatedMarch 26, 2015
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