Question 1:

Suppose you have been presented with some historical data on the average annual returns on common stock, corporate bonds, and U.S. Treasury bonds over the last 50 years. During that 50-year period the return on common stock averaged 13.5% per year, the return on corporate bonds was 9%, and the return on U.S. Treasury bonds was 6.75% per year. Based on these historical annual returns what was the average annual risk premium on common stock over corporate bonds? Also, what was the risk premium on corporate bonds over U.S. Treasury bonds over this 50-year period?

Risk Premium on Common Stock over Corporate Bonds =

Risk Premium on Corporate Bonds over Treasury Bonds =

Question 2:

Based on the following probability distribution along with the expected periodic

returns for a stock, determine the expected return (), and the standard deviation ().

Likelihood Stock's

State of of State Expected

the Economy Occurring (P_i) Return (r_i)

Expansion 0.35 -40%

Average 0.30 15%

Recession 0.35 50%

Expected Return () =

Standard Deviation () =