Use the following information to compare the recent performance of the S&P 500 Index, the Nasdaq Index, and the Treasury Bill Index from 1983-2003. Each of these index numbers is calculated in a way that assumes that investors reinvest any income they receive, so the total return equals the percentage change in the index value each year. The last column shows the level of the Consumer Price Index (CPI) at the end of each year, so the percentage change in the index indicates the rate of inflation for a particular year. Note that because the data start on December 31, 1983, it is not possible to calculate returns or an inflation rate in 1983.

For the S&P500, the Nasdaq, and the T-bill series calculate (a) the cumulative return over twenty years, (b) the average annual return in nominal terms, (c) the average annual return in real terms, and (d) the standard deviation of the nominal return. Based on these calculations, discuss the risk/return relationship between these indexes. Which asset class earned the highest average return? For which asset class were returns most volatile? Plot your results on a graph with the standard deviation of each asset class on the horizontal axis and the average return on the vertical axis.

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