Problem 10-8 Risk Premiums [LO 2]

Consider the following table for a period of six years:

	Returns
Year	Large-Company Stocks					U.S. Treasury Bills
1			14.89	%		7.33	%
2			26.53			8.01
3			37.27			5.91
4			23.97			5.27
5			7.24			5.47
6			6.61			7.70

Calculate the arithmetic average returns for large-company stocks and T-bills over this time period. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

	Arithmetic average returns
Large-company stock	%
T-bills	%

Calculate the standard deviation of the returns for large-company stocks and T-bills over this time period. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

	Standard deviation
Large-company stock	%
T-bills	%

Calculate the observed risk premium in each year for the large-company stocks versus the T-bills. a. What was the arithmetic average risk premium over this period? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Average risk premium % b. What was the standard deviation of the risk premium over this period? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Risk premium standard deviation %

References

eBook & Resources

WorksheetLearning Objective: 10-02 Discuss the historical returns on various important types of investments.Section: 10.5 More On Average Returns

Problem 10-8 Risk Premiums [LO 2]Section: 10.2 The Historical Record

Difficulty: 1 BasicSection: 10.3 Average Returns: The First Lesson