Problem 12-8 Risk Premiums [LO2, 3]

Suppose we have the following returns for large-company stocks and Treasury bills over a six-year period:

Year Large-Company stocks US Treasury bills

1 3.98% 6.62%

2 14.17 4.44

3 19.31 4.31

4 14.37 7.33

5 31.86 5.36

6 37.02 6.23

a.Calculate the arithmetic average returns for large-company stocks and T-bills over this period. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)b.Calculate the standard deviation of the returns for large-company stocks and T-bills over this period. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)c-1.Calculate the observed risk premium in each year for the large-company stocks versus the T-bills. What was the 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.)c-2.Calculate the observed risk premium in each year for the large-company stocks versus the T-bills. 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.)