Each month for the past several years, you have collected the monthly returns to an index of large-cap value stocks and an index of large-cap growth stocks. For the last two years, for both of the indexes you have converted these monthly returns into a series of rolling average annualized returns by taking an average of the previous 12 monthly returns and multiplying that average by 12. These rolling average annualized returns are shown below for each index over the past 24 months.

1. For both the value and growth indexes, calculate the arithmetic mean of the 24 monthly average annualized returns. Which index appears to have outperformed the other over this period? Explain. Do not round intermediate calculations. Round your answers to two decimal places.

The Value Index: ____%

The Growth Index: ____ %

The _____________ (Growth Index / Value Index) appears to have outperformed the ____________ (Growth Index / Value Index) over the 24-month period by ____%.

b. For each month in this sample period, compute the difference in annualized returns between the value index and the growth index (R_value - R_growth). Calculate the average of this return differential series and compare it to your answers from part (a). Do not round intermediate calculations. Round your answers to two decimal places. Negative values, if any, should be indicated by a minus sign. If your answer is zero, enter 0.

c. The average of the return in the differential series is ________ (less than / more than / the same as) the difference in the arithmetic means.

d. The average return differential from part (b) is one way of calculating the risk premium associated with a value investment factor. Interpret this risk premium statistic and explain how it can be seen as the average annualized return earned by a hedge fund following a strategy to go long in value stocks and short in growth stocks. Do not round intermediate calculations. Round your answers to two decimal places. Negative values, if any, should be indicated by a minus sign.

A hedge fund that was following a strategy to go long in value stocks and short in growth stocks would ____________(have been / not have been) quite profitable. The hedge fund would have ____________(earned / lost) the average annualized return in the Value Index of %, thus _____________ (earning / losing) it the additional risk premium of ___%.

e. Compute the percentage of the months in the two-year sample period when the rolling average annualized return to the growth index was actually larger than that for the value index. Do not round intermediate calculations. Round your answers to two decimal places.

_____ %

What, if anything, does this tell you about the reliability of the value risk premium over time?

This means that the value risk premium of ____% was reliable for over ____% of the time in the period studied.

Value Index Annualized Growth Index Annualized Month Return (%) Return (%) 8.98% 17.31 26.71 17.29 17.15 17.96 19.31 17.21 18.21 22.26 28.73 22.75 26.24 21.57 21.60 25.31 26.79 27.96 16.89 22.07 20.31 15.79 14.90 25.06 9.88% 16.54 28.27 17.86 14.75 15.05 11.45 10.37 10.95 13.00 24.71 16.94 24.98 16.95 19.55 25.18 27.04 28.84 20.51 24.84 22.75 18.21 19.86 24.74 2 4 7 8 10 12 13 14 15 16 17 18 19 20 21 23 Month Rvalue - Rgrowth 10 12 13 14 15 16 17 18 19 20 21 23 24 Average Value Index Annualized Growth Index Annualized Month Return (%) Return (%) 8.98% 17.31 26.71 17.29 17.15 17.96 19.31 17.21 18.21 22.26 28.73 22.75 26.24 21.57 21.60 25.31 26.79 27.96 16.89 22.07 20.31 15.79 14.90 25.06 9.88% 16.54 28.27 17.86 14.75 15.05 11.45 10.37 10.95 13.00 24.71 16.94 24.98 16.95 19.55 25.18 27.04 28.84 20.51 24.84 22.75 18.21 19.86 24.74 2 4 7 8 10 12 13 14 15 16 17 18 19 20 21 23 Month Rvalue - Rgrowth 10 12 13 14 15 16 17 18 19 20 21 23 24 Average