FIN 620 Session 1 Homework Assignment Answers

FIN 620 Session 1 Homework Assignment Answers - FIN 620...

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FIN 620 Session 1 Homework Assignment Answers: Chapter 10: 10-8. We will calculate the sum of the returns for each asset and the observed risk premium first. Doing so, we get: Year Large co. stock return T-bill return Risk premium 1973 –14.69% 7.29% - 21.98% 1974 –26.47 7.99 –34.46 1975 37.23 5.87 31.36 1976 23.93 5.07 18.86 1977 –7.16 5.45 –12.61 1978 6.57 7.64 –1.07 19.41% 39.31% –19.90% a . The average return for large company stocks over this period was: Large company stock average return = 19.41% /6 Large company stock average return = 3.24% And the average return for T-bills over this period was: T T-bills average return = 39.31% / 6 UT-bills average return = 6.55% V b . Using the equation for variance, we find the variance for large company stocks over this period was: Variance = 1/5[(–.1469 – .0324) 2 + (–.2647 – .0324) 2 + (.3723 – .0324) 2 + (.2393 – .0324) 2 + (–.0716 – .0324) 2 + (.0657 – .0324) 2 ] Variance = 0.058136
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FIN 620 Session 1 Homework Assignment Answers - FIN 620...

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