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% |