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%