1. Suppose you are provided the following information about the historical (actual) returns, in percent terms, on a stock over the last four (4) years:

YEAR ANNUAL % RETURNS

2021 17%

2020 -5.5%

2019 22%

2018 9.25%

Calculate the average annual rate of return (the ex post return, ) earned on this stock from

2018 through 2021. Please round your answer to the second decimal place.

Average Annual Return, (%) =

2. Based on the following probability distribution along with the expected periodic

returns for a stock, determine the expected return (), and the standard deviation (σ).

Likelihood Stock's

State of of State Expected

the Economy Occurring (P_i) Return (r_i)

Expansion 0.40 40%

Average 0.20 15%

Recession 0.40 -25%

Expected Return () =

Standard Deviation (σ) =

3. Suppose you have been presented with some historical data on the average annual returns on common stock, corporate bonds, and U.S. Treasury bonds over the last 50 years. During that 50-year period the return on common stock averaged 13.5% per year, the return on corporate bonds was 9%, and the return on U.S. Treasury bonds was 6.75% per year. Assume as well that the average annual rate of inflation (INF) over the 50 year period was 4.5%. Based on these historical annual returns what was the average annual risk premium on common stock over corporate bonds in nominal terms? Also, what was the risk premium on corporate bonds over U.S. Treasury bonds over this 50-year period in real terms?

Nominal Risk Premium on Common Stock over Corporate Bonds =

Real Risk Premium on Corporate Bonds over Treasury Bonds =

Answer rating: 100% (QA)

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