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%