The following table shows the annual realized returns on the following US securities from 1997 to 2019: 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. To what extent is that illustrated by the annual returns in the table?

b. How do 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 2019 (measure the MRP first with government bonds and then with Treasury bills)? What was it over the two periods 19972019 and 19262019? What conclusions can you draw from your observations?

Source: Ibbotson, Roger. Stocks, Bonds, Bills and Inflation Yearbook, 2020. Source: Ibbotson, Roger. Stocks, Bonds, Bills and Inflation Yearbook, 2020