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Suppose we have the following returns for large-company stocks and Treasury bills over a six-year period: Year Large Company % US TreasuryBill % 1 4
Suppose we have the following returns for large-company stocks and Treasury bills over a six-year period:
Year Large Company % US TreasuryBill %
1 4.00 4.62
2 14.49 4.96
3 19.33 3.88
4 -14.35 7.00
5 -31.84 5.38
6 37.04 6.43
a) Calculate the arithmetic average returns for large-company stocks and T-bills over this time period.
b) Calculate the standard deviation of the returns for large-company stocks and T-bills over this time period.
c-1) Calculate the observed risk premium in each year for the large-company stocks versus the T-bills. What was the arithmetic average risk premium over this period?
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?
Expert Solution
a) Arithmetic average return ;
Large company = 4.78%
T-bill = 5.38%
b) Standard deviation ;
Large company = 24.72%
T-bill = 1.16%
c-1) Arithmetic average return = -0.60%
c-2) Standard deviation = 24.92%
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