Question
Look at the period from 1970 through 1975: Index Large Company Stocks Long Term Government Bonds US Treasury Bills Consumer Price Index 1970 3.94 18.92
Look at the period from 1970 through 1975:
| Index | Large Company Stocks | Long Term Government Bonds | US Treasury Bills | Consumer Price Index |
| 1970 | 3.94 | 18.92 | 6.5 | 5.57 |
| 1971 | 14.3 | 11.24 | 4.36 | 3.27 |
| 1972 | 18.99 | 2.39 | 4.23 | 3.41 |
| 1973 | -14.69 | 3.3 | 7.29 | 8.71 |
| 1974 | -26.47 | 4 | 7.99 | 12.34 |
| 1975 | 37.23 | 5.52 | 5.87 | 6.94 |
a. Calculate the arithmetic average returns for large-company stocks and T-bills over this period.
b. Calculate the standard deviation of the returns for large-company stocks and T-bills over this 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.
Input Area:
| Year | Large Stocks | T-bills |
| 1970 |
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| 1971 |
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| 1972 |
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| 1973 |
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| 1974 |
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| 1975 |
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Output Area:
| Large company stocks |
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| Year | Actual Return | Average Return | Deviation | Squared Deviation |
| 1970 |
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| 1971 |
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| 1972 |
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| 1973 |
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| 1974 |
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| 1975 |
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| Total |
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| Average return |
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| Variance |
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| Standard deviation |
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| T-bill returns |
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| Year | Actual Return | Average Return | Deviation | Squared Deviation |
| 1970 |
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| 1971 |
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| 1972 |
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| 1973 |
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| 1974 |
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| 1975 |
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| Total |
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| Variance |
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| Standard deviation |
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| Average observed risk premium |
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| Year | Actual | Average | Deviation | Squared Deviation |
| 1970 |
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| 1971 |
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| 1972 |
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| 1973 |
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| 1974 |
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| 1975 |
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| Total |
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| Average return |
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| Variance |
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| Standard deviation |
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