Problem 10-8 Risk Premiums

Suppose we have the following returns for large-company stocks and Treasury bills over a six-year period:

Year	Large Company			US Treasury Bill
1		3.88			5.78
2		14.31			2.45
3		19.05			3.68
4		14.63			7.12
5		32.12			4.92
6		37.29			4.89

a. 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 percent rounded to 2 decimal places, e.g., 32.16.)

	Average returns
Large-company stocks	4.63 4.63 Correct %
T-bills	4.81 4.81 Correct %

b. 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 percent rounded to 2 decimal places, e.g., 32.16.)

	Standard deviation
Large-company stocks	Not attempted %
T-bills	Not attempted %

c-1 Calculate the observed risk premium in each year for the large-company stocks versus the T-bills. What was the arithmetic average risk premium over this period? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Average risk premium Not attempted % c-2 Calculate the observed risk premium in each year for the large-company stocks versus the T-bills. What was the standard deviation of the risk premium over this period? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Standard deviation Not attempted %