PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 7, Problem 4PS
Risk premiums* Here are inflation rates and U.S. stock market and Treasury bill returns between 1929 and 1933:
- a. What was the real return on the stock market in each year?
- b. What was the average real return?
- c. What was the risk premium in each year?
- d. What was the average risk premium?
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ssume these were the inflation rates and U.S. stock market and Treasury bill returns between 1929 and 1933:
Year
Inflation(%)
Stock Market Return(%)
T-Bill Return(%)
1929
0.5
–13.2
6.1
1930
–5.5
–30.7
2.9
1931
–9.3
–47.6
1.5
1932
–13.2
–8.2
0.8
1933
0.9
64.2
0.6
What was the average risk premium?
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Item2
Assume these were the inflation rates and U.S. stock market and Treasury bill returns between 1929 and 1933:
Year
Inflation(%)
Stock Market Return(%)
T-Bill Return(%)
1929
0.4
–14.6
4.8
1930
–3.9
–27.1
2.9
1931
–8.2
–49.8
1.4
1932
–10.8
–6.4
0.9
1933
1.0
63.8
0.5
What was the real return on the stock market in each year?
What was the average real return?
What was the risk premium in each year?
What was the average risk premium?
Assume the average return on utility stocks was 8.9% over the past 40 years. �If the average return on Treasury bills was 3.8% over that period, what is the historical risk premium for utility stocks?
Chapter 7 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 7 - Rate of return The level of the Syldavia market...Ch. 7 - Real versus nominal returns The Costaguana stock...Ch. 7 - Arithmetic average and compound returns Integrated...Ch. 7 - Risk premiums Here are inflation rates and U.S....Ch. 7 - Risk Premium Suppose that in year 2030, investors...Ch. 7 - Stocks vs. bonds Each of the following statements...Ch. 7 - Expected return and standard deviation A game of...Ch. 7 - Standard deviation of returns The following table...Ch. 7 - Average returns and standard deviation During the...Ch. 7 - Prob. 10PS
Ch. 7 - Prob. 11PSCh. 7 - Diversification Here are the percentage returns on...Ch. 7 - Risk and diversification In which of the following...Ch. 7 - Prob. 14PSCh. 7 - Portfolio risk To calculate the variance of a...Ch. 7 - Portfolio risk a) How many variance terms and how...Ch. 7 - Portfolio risk Table 7.8 shows standard deviations...Ch. 7 - Portfolio risk Hyacinth Macaw invests 60% of her...Ch. 7 - Stock betas What is the beta of each of the stocks...Ch. 7 - Stock betas There are few, if any, real companies...Ch. 7 - Portfolio betas A portfolio contains equal...Ch. 7 - Portfolio betas Suppose the standard deviation of...Ch. 7 - Portfolio risk Here are some historical data on...Ch. 7 - Portfolio risk Suppose that Treasury bills offer a...
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- The inflation rate in the United States has averaged 3% a year since 1900. Use the data in the table below to answer the following question: 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 What was the average real rate of return on Treasury bills, Treasury bonds, and common stocks in that period? Note: Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.arrow_forwardYou've observed the following returns on Pine Computer's stock over the past five years -24.6 percent, 13.4 percent, 29.8 percent, 2.2 percent, and 21.2 percent. The average inflation rate over this period was 3.22 percent and the average T - bill rate over the period was 4.3 percent. What was the average real risk - free rate over this time period? What was the average real risk premium?arrow_forwardUse 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.arrow_forward
- You’ve observed the following returns on SkyNet Data Corporation’s stock over the past five years: 19 percent, 24 percent, 11 percent, −9 percent, and 13 percent. Suppose the average inflation rate over this period was 3.6 percent and the average T-bill rate over the period was 4.1 percent.a. What was the average real return on the company’s stock?b. What was the average nominal risk premium on the company’s stock?arrow_forwardAssume these are the stock market and Treasury bill returns for a 5-year period: Required: a. What was the risk premium on common stock in each year? b. What was the average risk premium? c. What was the standard deviation of the risk premium? (Ignore that the estimation is from a sample of data.)arrow_forwardHistorical stock returns show that small - company stocks produced an average return of 17.4 percent, inflation averaged 3.1 percent, U.S. Treasury bills returned an average 3.8 percent, and long - term corporate bonds returned 6.2 percent. What was the risk premium on small - company stocks for that period?arrow_forward
- Assume these are the stock market and Treasury bill returns for a 5-year period: Year Stock Market Return (%) T-Bill Return (%) 2016 13.0 0.2 2017 21.0 0.8 2018 -6.2 1.8 2019 29.8 2.1 2020 20.6 0.4 Required: What was the risk premium on common stock in each year? What was the average risk premium? What was the standard deviation of the risk premium? (Ignore that the estimation is from a sample of data.)arrow_forwardYou’ve observed the following returns on Crash-n-Burn Computer’s stock over the past five years: 14 percent, –9 percent, 16 percent, 21 percent, and 3 percent. Suppose the average inflation rate over this period was 3.5 percent and the average T-bill rate over the period was 4.2 percent. a. What was the average real return on the company’s stock? b. What was the average nominal risk premium on the company’s stock?arrow_forwardUse 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?arrow_forward
- Calculating Real Returns and Risk Premiums You’ve observed the following returns on Bennington Corporation’s stock over the past five years: 13 percent, −8 percent, 16 percent, 16 percent, and 10 percent. Suppose the average inflation rate over this period was 1.5 percent and the average T-bill rate over the period was 5 percent. a. What was the average real return on the company's stock? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What was the average nominal risk premium on the company's stock?arrow_forward1, Consider the following table for an eight-year period: Year T-bill return Inflation 1 7.47% 8.53% 2 8.94 12.16 3 6.05 6.76 4 5.97 5.04 5 5.63 6.52 6 8.54 8.84 7 10.74 13.11 8 13.00 12.34 a, Calculate the average return for Treasury bills and the average annual inflation rate (consumer price index) for this period. b, Calculate the standard deviation of Treasury bill returns and inflation over this time period. c, Calculate the real return for each year. d, What is the average real return for Treasury bills?arrow_forwardA stock had a return of 6.8 percent last year. If the inflation rate was 1.2 percent, what was the approximate real return? (Enter your answer as a percent rounded to 1 decimal place.)arrow_forward
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