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14. Risk Premiums ( 02) Refer to Table 1.1 for large-company stock and T-bill returns for the period 19731977: 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.

a.

b.

c.

d.

A $1 Investment in Different Types of Portfolios: 19262018 (Year-end 1925 = $1) FIGURE 1.1 100,000 -$29,781.01 10.000 Small-company stocks $6,462.39 1.000 Large-company stocks Value of a $1 investment 100 M$129,95 Long term government bonds Treasury bills $23.05 $1403 10 Inflation 1 1926 1 1946 1936 1956 1986 1966 1976 Year-end 1996 2006 2016 Source: SBBI Yearbook 2019. Duff & Phelps Looking at Figure 1.1, we see that the small-company investment did the best overall. Every dollar invested grew to a remarkable $29,871.01 over the 93 years. The larger common stock portfolio did less well; a dollar invested in il grew to $6,462.39 A $1 Investment in Different Types of Portfolios: 19262018 (Year-end 1925 = $1) FIGURE 1.1 100,000 -$29,781.01 10.000 Small-company stocks $6,462.39 1.000 Large-company stocks Value of a $1 investment 100 M$129,95 Long term government bonds Treasury bills $23.05 $1403 10 Inflation 1 1926 1 1946 1936 1956 1986 1966 1976 Year-end 1996 2006 2016 Source: SBBI Yearbook 2019. Duff & Phelps Looking at Figure 1.1, we see that the small-company investment did the best overall. Every dollar invested grew to a remarkable $29,871.01 over the 93 years. The larger common stock portfolio did less well; a dollar invested in il grew to $6,462.39