P1. From the information below, compute the average annual return, the variance, standard deviation, and coefficient of variation for each asset.

P1. From the information below, compute the average annual return, the variance, standard deviation, and coefficient of variation for each asset.

Asset

Annual Returns

A

5%,10%,15%,4%

B

-6%,20%,2%,-5%,10%

C

12%,15%,17%

D

10%,-10%,20%,-15%,8%,-7%

 

 

Asset A

Asset B

Asset C

Asset D

 

5%

-6%

12%

10%

 

10%

20%

15%

-10%

 

15%

2%

17%

20%

 

4%

-5%

 

-15%

 

 

10%

 

8%

 

 

 

 

-7%

Average

9%

4%

15%

1%

Variance

0.0026

0.0119

0.0006

0.0186

Std. dev

5.07%

10.92%

2.52%

13.65%

Coeff of var.

0.60

2.60

0.17

13.65

 

P2. Based upon your answers to question 1, which asset appears riskiest based on standard deviation? Based on coefficient of variation?

                      ASSET D appears the riskiest based in standard & coefficient.

P3. Recalling the definitions of risk premiums in Chapter 8 and using the Treasury bill return in Table 12.4 as an approximation to the nominal risk-free rate, what is the risk premium from investing in each of the other asset classes listed in Table 12.4?

P4. What is the real, or after-inflation, return from each of the asset classes listed in table 12.4?

 

Treasury Bill

Treasury Bond

Stocks

Inflation  Rate

Annual Ave Return

3.8%

5.4%

11.1%

3.2%

Standard Deviation

3.0%

7.6%

20.4%

4.0%

 

 

 

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