A. What risk premium do you use? Why? B. Why is the geometric mean lower than the arithmetic mean for both bonds and bills? C. If you had to use a risk premium with the longer periods, what biases will the investor have?
A. What risk premium do you use? Why? B. Why is the geometric mean lower than the arithmetic mean for both bonds and bills? C. If you had to use a risk premium with the longer periods, what biases will the investor have?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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A. What risk premium do you use? Why?
B. Why is the geometric mean lower than the arithmetic mean for both bonds and bills?
C. If you had to use a risk premium with the longer periods, what biases will the investor have?
Transcribed Image Text:The following table summarizes risk premiums for stocks in the United States, relative to
treasury bills and bonds, for different time periods:
Risk Premium for Equity
Stocks - T.Bills
Arithmetic
Stocks - T.Bonds
Geometric Arithmetic Geometric
1928-2011
7.55%
5.79%
5.62%
4.10%
1962-2011
5.38%
3.36%
4.02%
2.35%
2002-2011
3.12%
-1.92%
1.08%
-3.61%
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