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CHAPTER 12 B-229 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 risk-free 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 risk-free rate using the Fisher equation. The average real risk-free 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 risk-free rate from the average real return. So, the average real risk premium was: r rp f r = 7.83% – 0.68% = 7.15% 12. T-bill 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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B-230 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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