CHAPTER 12
B229
b
.
Using the equation to calculate variance, we find:
Variance = 1/4[(.07 – .116)
2
+ (–.12 – .116)
2
+ (.11 – .116)
2
+ (.38 – .116)
2
+
(.14 – .116)
2
]
Variance = 0.032030
So, the standard deviation is:
Standard deviation = (0.03230)
1/2
= 0.1790 or 17.90%
10.
a
.
To calculate the average real return, we can use the average return of the asset, and the average
inflation in the Fisher equation. Doing so, we find:
(1 + R) = (1 + r)(1 + h)
r
= (1.160/1.035) – 1 = .0783 or 7.83%
b
.
The average risk premium is simply the average return of the asset, minus the average riskfree
rate, so, the average risk premium for this asset would be:
R
RP
–
f
R = .1160 – .042 = .0740 or 7.40%
11.
We can find the average real riskfree rate using the Fisher equation. The average real riskfree rate was:
(1 + R) = (1 + r)(1 + h)
f
r = (1.042/1.035) – 1 = .0068 or 0.68%
And to calculate the average real risk premium, we can subtract the average riskfree rate from the
average real return. So, the average real risk premium was:
r
rp
–
f
r = 7.83% – 0.68% = 7.15%
12.
Tbill rates were highest in the early eighties. This was during a period of high inflation and is
consistent with the Fisher effect.
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SOLUTIONS
Intermediate
13.
To find the real return, we first need to find the nominal return, which means we need the current price
of the bond. Going back to the chapter on pricing bonds, we find the current price is:
P
1
= $80(PVIFA
7%,6
) + $1,000(PVIF
7%,6
) = $1,047.67
So the nominal return is:
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 Spring '06
 Tapley
 Finance, Normal Distribution, Standard Deviation, average return, 6.2 percent, 2.2 percent

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