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AfilCa [17]
3 years ago
5

Calculate the arithmetic average returns for large-company stocks and T-bills over this period. (Do not round intermediate calcu

lations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) b. Calculate the standard deviation of the returns for large-company stocks and T-bills over this period. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) c-1. Calculate the observed risk premium in each year for the large-company stocks versus the T-bills. What was the average risk premium over this period
Business
1 answer:
shepuryov [24]3 years ago
4 0

Answer:

a. Arithmetic average returns for large company stocks:

= (0.0389 + 0.1414 + 0.1913 - 0.1455 - 0.3204 + 0.3737) / 6

= 4.66%

Arithmetic average returns for T-bills:

= (0.0581 + 0.0247 + 0.0370 + 0.0713 + 0.0518 + 0.0616) / 6

= 0.05075

= 5.08%

b. First find variance.

Variance of large company stock:

Variance is divided by n - 1

= {(0.0389 - 0.0466)² + (0.1414 - 0.0466)² + (0.1913 - 0.0466)² + (-0.1455 - 0.0466)² + (-0.3204 - 0.0466)² + (0.3737 - 0.0466)²} / 5

= 0.0617140

Standard deviation = √0.0617140

= 24.84%

Variance of T-bills

= {(0.0581 - 0.0508)² + (0.0247 - 0.0508)² + (0.0370 - 0.0508)² + (0.0713 - 0.0508)² + (0.0518 - 0.0508)² + (0.0616 - 0.0508)²} / 5

= 0.0002926

Standard deviation = √0.0002926

= 1.71%

c. Risk Premiums:

Year 1                                        Year 2                                      Year 3

= 3.89% - 5.81%                        =  14.14% - 2.47%                     = 19.13% - 3.70%

= -1.92%                                    = 11.67%                                    = 15.43%

 

Year 4                                        Year 5                                      Year 6

= -14.55% - 7.13%                       = -32.04% - 5.18%                  =37.37% - 6.16%

= -21.68%                                  = -37.22%                                = 31.21%

Average risk premium:

= (-0.0192 + 0.1167 + 0.1543 - 0.2168 - 0.3722 + 0.3121) / 6

= -0.42%

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Explanation:

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If an activity generates a positive externality, the government can increase total economic surplus by ___ the activity, and if
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C. subsidizing: taxing

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3 years ago
Heather Smith is considering a bond investment in Locklear Airlines. The $1,000 parvalue bonds have a quoted annual interest rat
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Answer:

Price of the Bond is $868.82

Explanation:

Market Value of the bond is the present value of all cash flows of the bond. These cash flows include the coupon payment and the maturity payment of the bond. Price of the bond is calculated by following formula:

Market Value of the Bond = C/2 x [ ( 1 - ( 1 + r/2 )^-2n ) / r/2 ] + [ $1,000 / ( 1 + r/2 )^2n ]

Whereas

C = coupon payment = $110.00 (Par Value x Coupon Rate)

n = number of years = 7

r = market rate, or required yield = 14% = 0.14

P = value at maturity, or par value = $1,000

Price Value of the Bond = $110/2 x [ ( 1 - ( 1 + 14%/2 )^-2x7 ) / 14%/2 ] + [ $1,000 / ( 1 + 14%/2 )^2x7 ]

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Price of the Bond = $481.0+$387.82

Price of the Bond = $868.82

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3 years ago
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