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Hypothetical Returns - Risk Premium

Here are some hypothetical returns during the past seven years on a market portfolio of common stocks and a portfolio of treasury bills.

Year Common Stocks Treasury Bills

-7 32.4% 11.2%
-6 -4.9% 14.7%
-5 21.4 10.5
-4 22.5 8.8
-3 6.3 9.9
-2 32.2 7.7
last 18.5 6.2

The realized risk premium is the return on common stocks less the return on treasury bills.

a. Calculate the realized risk premium of common stocks over treasury bills in each year
b. Calculate the average risk premium of common stocks over treasury bills during the seven-year period
c. Is it possible for the observed risk premium to be negative? Explain.

Solution Preview

The realized risk premium is the return on common stocks less the return on treasury bills.

a. calculate the realized risk premium of common stocks over treasury bills in each year

Year Common ...

Solution Summary

The solution discusses risk premiums and hypothetical returns.

$2.19