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Series Small-company stocks Large-company stocks Long-term government bonds U.S. Treasury Bills Inflation Arithmetic Average Return 16.2% 12.2% 6.1% 3.3% 2.9% Standard Deviation of Returns 31.3%
Series Small-company stocks Large-company stocks Long-term government bonds U.S. Treasury Bills Inflation Arithmetic Average Return 16.2% 12.2% 6.1% 3.3% 2.9% Standard Deviation of Returns 31.3% 19.7% 9.8% 3.1% 4.0% c. (6 points) The premium on small-company stocks over large company stocks (large company stocks is a good proxy for the "market portfolio," really) is quite large. The estimated beta of the small-company stocks portfolio is 1.30. Based on an estimated CAPM (Security Market Line) using the average return on Large-company stocks as E[RM] and the average return on T-bills as RF, what is the "predicted" expected return on the small-company stock portfolio? Is the actual average return on the small-stock portfolio higher or lower than this "predicted" expected return
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