8 us treasury bills 38 inflation 31 7 risk premiums

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Unformatted text preview: lls 3.8% Inflation 3.1% 7 Risk Premiums The “extra” return earned for taking on risk Treasury bills are considered to be risk- free The risk premium is the return over and The above the risk-free rate above 8 Table 12.3 Average Annual Table Returns and Risk Premiums Returns Investment Average Return Risk Premium Large stocks 12.3% 8.5% Small Stocks 17.4% 13.6% Long-term Corporate Long-term Bonds Bonds 6.2% 2.4% Long-term Government Long-term Bonds Bonds 5.8% 2.0% U.S. Treasury Bills 3.8% 0.0% 9 Efficient Capital Markets Stock prices are in equilibrium or are Stock “fairly” priced “fairly” If this is true, then you should not be able If to earn “abnormal” or “excess” returns to Efficient markets DO NOT imply that Efficient DO investors cannot earn a positive return in the stock market the 10 10 Figure 12.12 11 11 What Makes Markets Efficient? There are many investors out there doing There research research As new information comes to market, this As information is analyzed and trades are made based on this information based Therefore, prices should reflect all available Therefore, public information public If investors stop researching stocks, then If the market will not be efficient the 12 12 Strong Form Efficiency Prices reflect all information, including public and Prices private private If the market is strong form efficient, then If investors could not earn abnormal returns regardless of the information they possessed regardless Empirical evidence in...
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