1. 8.

Risk premiums [LO 12.2, 12.3] Refer to Table 12.1 in the text and look at the period from 2000 through 2006.

1. Calculate the arithmetic average returns for shares and cash over this period.
2. Calculate the standard deviation of the returns for shares and cash over this period.
3. Calculate the observed risk premium in each half year for the shares versus the cash. What was the average risk premium over this period? What was the standard deviation of the risk premium over this period?
4. 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.