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CHAPTER 10
Solutions to Questions and Problems
5.
The nominal return is the stated return, which is 11.70 percent. Using the Fisher equation, the real
return was:
(1 + R) = (1 + r)(1 + h)
r = (1.1170)/(1.031) – 1
r = .0834 or 8.34%
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
Tbill 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%
Total
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%
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View Full DocumentAnd the average return for Tbills over this period was:
T
Tbills average return = 39.31% / 6
U
Tbills average return = 6.55%
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
And the standard deviation for large company stocks over this period was:
Standard deviation = (0.058136)
1/2
Standard deviation = 0.2411 or 24.11%
Using the equation for variance, we find the variance for Tbills over this period was:
Variance = 1/5[(.0729 – .0655)
2
+ (.0799 – .0655)
2
+ (.0587 – .0655)
2
+ (.0507 – .0655)
2
+
(.0545 – .0655)
2
+ (.0764 – .0655)
2
]
Variance = 0.000153
And the standard deviation for Tbills over this period was:
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 Spring '12
 wike

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