Question: 1. Below are the expected returns for different asset classes for next year: Asset class Exp. return T-bills 2.8% Corporate bonds 6.8% Small company stocks

1. Below are the expected returns for different asset classes for next year:

Asset class Exp. return
T-bills 2.8%
Corporate bonds 6.8%
Small company stocks 17.9%
Large company stocks 8.4%

a. What is the risk premium for corporate bonds?

b. What is the risk premium for small company stocks?

c. What is the risk premium for large company stocks?

2. You predict the following expected returns for a stock and Treasury bills:

Year Stock T-bills
2021 12% 5%
2020 8% 5%
2019 15% 2%

a. What is the risk premium for the stock in 2021?

b. What is the (arithmetic) average expected return for the stock?

c. What was the (arithmetic) average expected return for T-bills?

d. What is the average risk premium?

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