The following table shows the annual realized returns on the following US securi- ties from 1997 to 2016: the stock market (S&P 500), corporate bonds, government bonds, and Treasury bills.

a. Theory suggests that the riskier the investment, the higher the expected return. Discuss the extent to which this is illustrated by the data in the table.

b. How would you explain the relatively high volatility in the annual returns on both corporate and government long term bonds?

c. What was the market risk premium of the S&P 500 for each of the years from 1997 to 2016? What was it over the two periods 1997 2012 and 1926 -2016, using averages? What conclusions can you draw?

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Corporate Bonds Rate Time Period Treasury Bills Rate 5.3% 4.9 1997 1998 1999 2000 2001 2002 S&P 500 33.4% 28.6 21.0 -9.1 -11.9 -22.1 12.9% 10.8 -7.4 12.9 Government Bonds Rate 15.9% 13.1 -9.0 21.5 3.7 17.8 10.6 16.3 3.8 1.6 2003 28.7 10.9 4.9 5.9 3.2 2004 2005 2006 2007 2008 2009 2010 9.9 15.8 5.5 -37.0 26.5 15.1 8.8 1.6 3.0 0.1 2.1 16.0 25.9 -14.9 10.1 27.1 3.4 -12.8 24.7 -0.7 32.4 12.4 17.9 10.7 -7.1 17.3 -1.0 6.7 2011 2012 2013 2014 13.7 2015 2016 12.0 Annual arithmetic average 1998-2016 9.4% 19262016 12.0% Source: 2017 SBBI Yearbook. 0.1 0.0 0.1 0.0 0.0 0.0 0.2 1.4 1.8 7.5% 6.3% 7.8% 6.0% 2.6% 3.4%