Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Textbook Question
Chapter 5, Problem 10PS
What has been the historical average real
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Use the data in the tables below to answer the following questions:
Average rates of return on Treasury bills, government bonds, and common stocks, 1900–2020.
Portfolio
Average Annual Rate of Return (%)
Average Premium (Extra return versus Treasury bills) (%)
Treasury bills
3.7
Treasury bonds
5.4
1.7
Common stocks
11.5
7.8
Standard deviation of returns, 1900–2020.
Portfolio
Standard Deviation (%)
Treasury bills
2.8
Long-term government bonds
8.9
Common stocks
19.5
What was the average rate of return on large U.S. common stocks from 1900 to 2020?
What was the average risk premium on large stocks?
What was the standard deviation of returns on common stocks?
Note: Enter your answer as a percent rounded to 1 decimal place.
Use the following table:
Series
Average return
Large stocks
11.76
%
Small stocks
16.46
Long-term corporate bonds
6.23
Long-term government bonds
6.10
U.S. Treasury bills
3.83
Inflation
3.10
a.
Determine the return on a portfolio that was equally invested in large-company stocks and long-term corporate bonds.
b.
What was the return on a portfolio that was equally invested in small stocks and Treasury bills?
How does the credit spread change with the bond rating? Why?
Security Yield
Treasury 3.120AAA corporate 3.874BBB corporate 4.521B corporate 5.328
Chapter 5 Solutions
Essentials Of Investments
Ch. 5 - Prob. 1PSCh. 5 - The real interest rate approximately equals the...Ch. 5 - When estimating a Sharpe ratio, would it make...Ch. 5 - You’ve just decided upon your capital allocation...Ch. 5 - Prob. 5PSCh. 5 - The stock of Business Adventures sells for $40 a...Ch. 5 - Prob. 7PSCh. 5 - a. Suppose you forecast that the standard...Ch. 5 - Using the historical risk premiums as your guide,...Ch. 5 - What has been the historical average real rate of...
Ch. 5 - Consider a risky portfolio. The end-of-year cash...Ch. 5 - For Problems 12-16, assume that you manage a risky...Ch. 5 - For Problems 12-16, assume that you manage a risky...Ch. 5 - For Problems 12-16, assume that you manage a risky...Ch. 5 - For Problems 12-16, assume that you manage a risky...Ch. 5 - For Problems 12-16, assume that you manage a risky...Ch. 5 - Prob. 17PSCh. 5 - You manage an equity fund with an expected risk...Ch. 5 - What is the reward-to--volatility (Sharpe) ratio...Ch. 5 - A portfolio of nondividend-paying stocks earned a...Ch. 5 - Which of the following statements about the...Ch. 5 - Which of the following statements reflects the...Ch. 5 - Use the following data in answering CFA Questions...Ch. 5 - Prob. 5CPCh. 5 - Lise the following data in answerifng CFA Question...Ch. 5 - Use the following scenario analysis for stocks X...Ch. 5 - Prob. 8CPCh. 5 - Use the following scenario analysis for stocks X...Ch. 5 - 10. Probabilities for three states of the economy...Ch. 5 - 11. An analyst estimates that a stock has the...Ch. 5 - Prob. 1WMCh. 5 - Prob. 2WMCh. 5 - Prob. 3WM
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- In Chapter 7, we saw that if the market interest rate, rd, for a given bond increased, the price of the bond would decline. Applying this same logic to stocks, explain (a) how a decrease in risk aversion would affect stocks prices and earned rates of return, (b) how this would affect risk premiums as measured by the historical difference between returns on stocks and returns on bonds, and (c) what the implications of this would be for the use of historical risk premiums when applying the SML equation.arrow_forwardIf the average return on common stocks was 13.3%, the average Treasury bill rate was 3.8%, and the average inflation rate was 3.2% what would be the expected nominal and approximate real market return for common stocks if the Treasury bill rate is expected to be 5.5% and the inflation rate is 4.1%? A) 9.5%, 13.6%. B) 13.6%, 9.5%. C) 90%, 10.9%. D) 14.6%, 9.1%.arrow_forwardwhat is the cost of debt after tax? what is the cost of PS what is the cost of common stock? what is the weight of the bond what is the weight of the stock what is the weight of preferred stock what is the WACC?arrow_forward
- Which one of the following is a correct ranking of securities based on their volatility over a very long-term period? Rank from highest to lowest. - large company stocks, U.S. Treasury bills, long-term government bonds - small company stocks, long-term corporate bonds, large company stocks - small company stocks, long-term corporate bonds, intermediate-term government bonds - large company stocks, small company stocks, long-term government bonds - intermediate-term government bonds, long-term corporate bonds, U.S. Treasury billsarrow_forwardHow do stock prices vary with the following: 1. the expected growth rate of dividends (earnings); 2. the benchmark (risk-free) interest rate: 3. the equity premiumarrow_forwardHow can studying the historical returns of stocks, bonds, and inflation increase your understanding of today’s financial markets?arrow_forward
- which one is correct please confirm? QUESTION 13 Studies analyzing the historical returns earned by common stock investors have found that the returns from average risk common stock investments over very long time periods have averaged approximately ____ percentage points ____ than holding period returns on corporate debt issues. a. 7.5; lower b. 7.5; higher c. 5.7; higher d. 5.7; lowerarrow_forwardwhat is the formula for caculation the rate on long-term Treasury bonds?arrow_forwardHow does Standard & Poor's rate IBM's senior long-term debt, preferred stock, and commercial paper?arrow_forward
- Indicate whether the following instruments are examples of money market or capital marketsecurities.a. U.S. Treasury billsb. Long-term corporate bondsc. Common stocksd. Preferred stockse. Dealer commercial paperarrow_forwardThe following were gathered for estimating the cost of equity of KKK Corporation: Return on Treasury Bonds = 4%; Return on the Market = 10%; Return on KKK Bonds = 6%. Upon analysis, you determined that the beta of KKK shares relating to the market return is 1.2 while a risk premium of 4% should be given to KKK's investors over its creditors. How much is the cost of equity using the bond plus risk premium?arrow_forwardWhich one is correct answer please confirm? Studies analyzing the historical returns earned by common stock investors have found that the returns from average risk common stock investments over very long time periods have averaged approximately ____ percentage points ____ than holding period returns on corporate debt issues. a. 5.7; higher b. 5.7; lower c. 7.5; higher d. 7.5; lowerarrow_forward
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