Question
a) You can either purchase a T-bill or a stock. The T-bill earns the risk-free rate of 2.5%, whereas the stock earns 6%. Explain the
a) You can either purchase a T-bill or a stock. The T-bill earns the risk-free rate of 2.5%, whereas the stock earns 6%. Explain the concept of a risk premium, and why investors might prefer one investment over the other?
b) Suppose a hedge fund is interested in estimating their money at risk, out of the total $250 million they have invested in the stock market. Based on historical data 90% of the time the annual return was between -18.45% and 31.17%. Given this information, assuming a normal distribution, what is the 5% value at risk (VaR)? (1mark)
c)In the long run do bonds, small company stocks or large company stocks perform better? Why might this be?
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