Many analysts use past data on stock and government security returns to estimate a historical risk premium. Assume that the arithmetic (geometric) average of annual stock returns is 10% (9%) and that the arithmetic (geometric) average of annual treasury bond returns is 5% (4.5%) over a hundred-year period. If the annualized standard deviation in stock returns over this period was 20%, which of the following is your fairest characterization of the historical risk premium (which you plan to use in your long term hurdle rate)? Select one: a. Historical risk premium is 5%, standard error is 20% b. Historical risk premium is 4.5%, standard error is 2% c. Historical risk premium is 5.5%, standard error is 2% d. Historical risk premium is 4%, standard error is 2% e. None of the above

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Which of the following statements best describes what the Rsquared of 52.6% in the regression that estimates the Beta for Goldman Sachs is telling you about the risk? Select one: a. None of the above b. 52.6% of the total risk in the firm is market risk c. 52.6% of the total risk in the firm can be diversified away d. 52.6% of the total risk in the firm is firm specific risk e. 52.6% of the beta can be attributed to market risk

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