## T-bills Rates At Their Highest Over The Period Why Do You Think They Were So High

8. Risk Premiums Refer to Table 12.1 in the text and look at the period from Basic 1970 through 1975. (continued)

a. Calculate the 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. 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? What was the standard deviation of the risk premium over this period?

d. Is it possible for the risk premium to be negative before an investment is undertaken? Can the risk premium be negative after the fact? Explain.

9. Calculating Returns and Variability You've observed the following returns on Crash-n-Burn Computer's stock over the past five years: -8 percent, 13 percent, 5 percent, 16 percent, and 32 percent.

a. What was the average return on Crash-n-Burn's stock over this five-year period?

b. What was the variance of Crash-n-Burn's returns over this period? The standard deviation?

10. Calculating Real Returns and Risk Premiums For Problem 9, suppose the average inflation rate over this period was 3.5 percent and the average T-bill rate over the period was 4.2 percent.

a. What was the average real return on Crash-n-Burn's stock?

b. What was the average nominal risk premium on Crash-n-Burn's stock?

11. Calculating Real Rates Given the information in Problem 10, what was the average real risk-free rate over this time period? What was the average real risk premium?

12. Effects of Inflation Look at Table 12.1 and Figure 12.7 in the text. When were T-bill rates at their highest over the period from 1926 through 2000? Why do you think they were so high during this period? What relationship underlies your answer?

13. Calculating Investment Returns You bought one of Great White Shark Re- Intermediate pellant Co.'s 9 percent coupon bonds one year ago for \$1,020. These bonds (Questions 13-16) make annual payments and mature six years from now. Suppose you decide to sell your bonds today, when the required return on the bonds is 10 percent. If the inflation rate was 4.2 percent over the past year, what was your total real return on investment?

14. Using Return Distributions Suppose the returns on long-term government bonds are normally distributed. Based on the historical record, what is the approximate probability that your return on these bonds will be less than -3.7 percent in a given year? What range of returns would you expect to see 95 percent of the time? What range would you expect to see 99 percent of the time?

15. Using Return Distributions Assuming that the returns from holding small-company stocks are normally distributed, what is the approximate probability that your money will double in value in a single year? What about triple in value?

16. Distributions In Problem 15, what is the probability that the return is less than -100 percent (think)? What are the implications for the distribution of returns?

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### Responses

• claudia
What range of returns would you expect to see 95 percent of the time for longterm corporate bonds?
7 years ago
• laura koehler
What range of returns would you expect to see 68 percent of the time for largecompany stocks?
7 years ago
• zane wright
Why are t bill rates high during inflation?
7 years ago
• ariam
When do t bills have largest return?
7 years ago
• otis thompson
Why t bill high during this period what relationship?
7 years ago
• jackson
What was the risk premium on largecompany stocks during this time period?
6 years ago
• Gregorio
Why were Tbills rates at their highest in 1981?
6 years ago