# Consider the following rates of return a. Calculate the arithmetic average returns for large...

## Question:

Consider the following rates of return:

Year Large-Company Stocks US Treasury Bills
1 3.96% 4.50%
2 14.12 4.88
3 19.01 3.80
4 -14.67 6.96
5 -32.16 4.88
6 37.26 6.14

a. Calculate the arithmetic average returns for large-company stocks and T-bills over this period.

Average returns
Large-company stocks 4.56%%
T-bills 5.19%%

b. Calculate the standard deviation of the returns for large-company stocks and T-bills over this period.

Standard deviation
Large-company stocks 24.85%
T-bills 1.15%

c-1. Calculate the observed risk premium in each year for the large-company stocks versus the T-bills. What was the arithmetic average risk premium over this period?

c-2. Calculate the observed risk premium in each year for the large-company stocks versus the T-bills. What was the standard deviation of the risk premium over this period?

Standard deviation 25%

Risk management is a process of identifying the potential risks of an investment in order to avoid losses before making an investment or economic decisions. It is significant skills to develop particularly in the profession of fund management due to investor prefer to those managers with strong risk management skills to preserve their capital.

#### Question (a)

Formula for the arithmetic mean:

{eq}Arithmetic~mean=\frac{Sum~of~returns}{Number~of~returns} {/eq}

Large-company arithmetic mean:

• Ar...

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