Question
The following table contains the historic returns from large stocks and long-term Treasury bonds over the last 20 years. Analyze the risk-return trade-off that would
The following table contains the historic returns from large stocks and long-term Treasury bonds over the last 20 years. Analyze the risk-return trade-off that would have characterized these portfolios. |
Year | Large Stock | Long-Term T-Bonds | T-Bills |
1989 | 31.34 | 19.49 | 8.38 |
1990 | 3.20 | 7.13 | 7.84 |
1991 | 30.66 | 18.39 | 5.60 |
1992 | 7.71 | 7.79 | 3.50 |
1993 | 9.87 | 15.48 | 2.90 |
1994 | 1.29 | 7.18 | 3.91 |
1995 | 37.71 | 31.67 | 5.60 |
1996 | 23.07 | 0.81 | 5.20 |
1997 | 33.17 | 15.08 | 5.25 |
1998 | 28.58 | 13.52 | 4.85 |
1999 | 21.04 | 8.74 | 4.69 |
2000 | 9.10 | 20.27 | 5.88 |
2001 | 11.89 | 4.21 | 3.86 |
2002 | 22.10 | 16.79 | 1.63 |
2003 | 28.69 | 2.38 | 1.02 |
2004 | 10.88 | 7.71 | 1.19 |
2005 | 4.91 | 6.50 | 2.98 |
2006 | 11.78 | 1.21 | 4.81 |
2007 | 3.53 | 10.25 | 4.67 |
2008 | 38.49 | 1.34 | 1.55 |
a. | Calculate the average rate of return and standard deviation of the "Excess returns" after a continuous compounding transformation was performed.(Round your answers to 2 decimal places.) |
Large Stock | Long Term T-Bonds | |
Average rate of return | % | % |
Standard deviation | % | % |
b. | What was the correlation coefficient of their annual returns? (Round your answer to 2 decimal places.) |
Correlation coefficient |
c. | What would have been the average return and standard deviation of portfolios with differing weights in the two assets? For example, consider weights in stocks starting at zero and incrementing by .10 up to a weight of 1.0. (Round your answers to 2 decimal places.) |
Weights in | Portfolio | ||
Stocks | Bonds | Mean | Standard deviation |
0.0 | 1 | % | % |
0.1 | 0.9 | % | % |
0.2 | 0.8 | % | % |
0.3 | 0.7 | % | % |
0.4 | 0.6 | % | % |
0.5 | 0.5 | % | % |
0.6 | 0.4 | % | % |
0.7 | 0.3 | % | % |
0.8 | 0.2 | % | % |
0.9 | 0.1 | % | % |
0.10 | 0 | % | % |
d. | What was the average return and standard deviation of the minimum-variance combination of stocks and bonds? (Round your answers to 2 decimal places.) |
Weights in | Portfolio | |||
Stocks | Bonds | Mean | Standard deviation | |
Minimum-Variance | 0.1338 | 0.8662 | % | % |
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