Problem 10-8 Risk Premiums [LO 2]

Consider the following table for a period of six years.

	Returns
Year	Large-Company Stocks					U.S. Treasury Bills
Year 1			16.49	%		7.65	%
Year 2			27.01			8.17
Year 3			37.59			6.23
Year 4			24.29			6.87
Year 5			7.88			5.63
Year 6			6.93			8.18

Requirement 1:

Calculate the arithmetic average returns for large-company stocks and T-bills over this time period. (Do not round intermediate calculations. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).)

	Arithmetic average returns
Large-company stock	%
T-bills	%

Requirement 2:

Calculate the standard deviation of the returns for large-company stocks and T-bills over this time period. (Do not round intermediate calculations. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).)

	Standard deviation
Large-company stock	%
T-bills	%

Requirement 3:
Calculate the observed risk premium in each year for the large-company stocks versus the T-bills.
(a)	What was the arithmetic average risk premium over this period? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Risk premium

%

(b)	What was the standard deviation of the risk premium over this period? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Risk premium standard deviation

%