The following table contains the historic returns from large stocks and long-term Treasury bonds over the last 20 years. Analyze the risk-return trade-off that would have characterized these portfolios.
 

 

Year	Large Stock	Long-Term T-Bonds	T-Bills
2000	−11.71	14.49	5.89
2001	−11.42	4.03	3.78
2002	−21.13	14.66	1.63
2003	31.77	1.28	1.02
2004	11.92	5.19	1.20
2005	6.05	3.10	2.96
2006	15.39	2.27	4.79
2007	5.71	9.64	4.67
2008	−36.87	17.67	1.47
2009	28.36	−5.83	0.10
2010	17.49	7.45	0.12
2011	0.48	16.60	0.04
2012	16.34	3.59	0.06
2013	35.23	−6.90	0.03
2014	11.72	10.15	0.02
2015	0.08	1.07	0.01
2016	13.49	0.70	0.1886
2017	22.29	2.80	0.7914
2018	−5.22	0.04	1.7066
2019	30.43	8.2622	2.15

 

Required:

Calculate the average rate of return and standard deviation of the "Excess returns" after a continuous compounding transformation was performed.

Transcribed Image Text:

Suppose that over two periods a stock price moces on a binomial tree 15 30 36 12. 16 10 Determine for what values of the riskless rater there is no arbitrage. If r 1/4, determine the equivalent martingale measure. With this value of r, find the time-zero price and replicating portfolio for a European put option with strike 15 and expiry 2. Consider a single-period trinomial model, with two assets, a riskless bond Sand a risky share S, We have initially that both are worth 1: so s and that S1+r. The risky asset at time I will be worth a if the period was bad, 6 if the period was indifferent, and e if the period was good, a Suppose that over two periods a stock price moces on a binomial tree 15 30 36 12. 16 10 Determine for what values of the riskless rater there is no arbitrage. If r 1/4, determine the equivalent martingale measure. With this value of r, find the time-zero price and replicating portfolio for a European put option with strike 15 and expiry 2. Consider a single-period trinomial model, with two assets, a riskless bond Sand a risky share S, We have initially that both are worth 1: so s and that S1+r. The risky asset at time I will be worth a if the period was bad, 6 if the period was indifferent, and e if the period was good, a

Answer rating: 100% (QA)

To calculate the average rate of return and standard deviation of the Excess returns after a continu... View the full answer