The following information is provided: average annual rate of return for common stocks is 8.0%, • average annual rate of return for corporate bonds is 5.0%, • the average annual rate of return for U.S. Treasury bills is 3.0%, • average GDP growth is 2% What is the average market risk premium? O 5.0% O 13% O 2% O 8% O 6.0%

The following information is provided: average annual rate of return for common stocks is 8.0%, • average annual rate of return for corporate bonds is 5.0%, • the average annual rate of return for U.S. Treasury bills is 3.0%, • average GDP growth is 2% What is the average market risk premium? O 5.0% O 13% O 2% O 8% O 6.0%

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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Consider the following table for the period from 1973 through 1980. Inflation 8.80% 12.20 7.01 4.81 6.77 9.03 13.31 12.40 Year 1973 1974 1975 1976 1977 1978 1979 1980 T-bill return 6.93% 8.00 5.80 5.08 5.12 7.18 10.38 11.24 a. Calculate the average return for Treasury bills and the average annual Inflation rate (consumer price Index) for this period. Note: Do not round Intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16. b. Calculate the standard deviation of Treasury bill returns and Inflation over this time period. Note: Do not round Intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16. c. Calculate the real return for each year. Note: A negative answer should be indicated by a minus sign. Do not round Intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16. d. What is the average real return for Treasury bills? Note: A negative answer…
Use the data in the tables below to answer the following questions: Average rates of return on Treasury bills, government bonds, and common stocks, 1900-2017. Average Premium Portfolio Treasury bills Treasury bonds Common stocks Average Annual Rate of Return (%) (Extra return versus Treasury bills) (%) 3.8 5.3 11.5 1.5 7.7 Standard deviation of returns, 1900-2017. Standard Portfolio Deviation (%) Treasury bills 2.9 Long-term government bonds 9.0 Common stocks 19.7 a. What was the average rate of return on large U.S. common stocks from 1900 to 2017? b. What was the average risk premium on large stocks? c. What was the standard deviation of returns on common stocks? (Enter your answer as a percent rounded to 1 decimal place.) a. Average rate of return 11.5 % b. Average risk premium 7.7 % C. Standard deviation of returns 19.7 %
Currently, 3-year Treasury securities yield8.7%,7-year Treasury securities yield8.4%, and 10 -year Treasury securities yield8.2%. If the expectations theory is correct, what does the market expect will be the yield on 3-year Treasury securities seven years from today? 8.13%8.33%7.73%7.53%7.93%
Consider the following information on different asset classes from 1926 through 2020. Arithmetic Mean 12.2% 16.2 6.5 6.1 5.3 3.3 2.9 Series Large-company stocks Small-company stocks Long-term corporate bonds Long-term government bonds Intermediate-term government bonds U.S. Treasury bills Inflation a. What is the real return on long-term government bonds? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. b. What is the real return on long-term corporate bonds? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. a. Real return b. Real return % %
Consider the folllowing cash flows. The market interest rate is 14%. What is the price of the bond? Year 0 1 2 3 4 CF 200 200 50 350 rate 14% DCF 175.44 153.89 33.75 207.23
Suppose interest rates on Treasury bonds rose from 5% to 9% as a result of higher interest rates in Europe. What effect would this have on the price of an average company's common stock? (Hint: in your explanation consider alternative investment to common stocks; a relatively riskless investment)
470 -37 Assume that the dividend payout ratio will be 55 % when the rate on long term government bonds falls to 9%. Since investors are becoming more risk averse, the equity risk premium will rise to 8% and investors will require a 7% return. The return on equity will be 13%. What is your expectation of the market P/E ration? a. 37.69 b. 24.92 c. 58.15 d. 55.02 e. 47.82
Suppose that the Kat Corporation over the past five years has had an average annual return of 7%. During that same period, the average annual return for the stock market was 3% and the average annual return on U.S. Treasury bills was 1%. The beta of Kat Corporation is estimated to be 2. What was Kat Corporation's excess return over the five-year period? O 3% O 4% O 5% O 6%
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.
3. The following graph depicts a macro equilibrium. Answer the questions based on the information in the graph.(a) What is the equilibrium rate of GDP?(b) If full-employment real GDP is $1200, what problem does this economy have?(c) How large is the real GDP gap?
You are given the following long-run annual rates of return for alternative investment instruments: U.S. Government T-bills 3.50% [0.0048] Large-cap common stock 11.75 [ ] Long-term corporate bonds 5.50 [ ] Long-term government bonds 4.90 [ ] Small-capitalization common stock 13.10 [ ] The annual rate of inflation during this period was 3 percent. Compute the real rate of return on these investment alternatives.
Consider the following table of annual rates of return, in percentage, for four common risky assets over the time period 2010 to 2019 • Berkshire Hathaway (ticker: BRK/A) • S&P 500 Index (ticker: SPX) • NASDAQ 100 Index (ticker: NDX) • Russell 2000 Index (ticker: RUT) YEAR BRK/A SPX NDX RUT 2010 21.4 15.1 19.22 26.85 2011 -4.7 2.1 2.7 -4.18 2012 16.8 16 16.82 16.35 2013 32.7 32.4 34.99 38.82 2014 27 13.7 17.94 4.89 2015 -12.5 1.4 8.43 -4.41 2016 23.4 12 5.89 21.31 2017 21.9 21.8 31.52 14.65 2018 2.8 -4.4 -1.04 -11.01 2019 11 31.5 37.96 25.52 Now assume there is a risk-free asset available and the annual risk-free rate is 2%. Using mean-variance portfolio theory, determine the 4 portfolio weightings and the portfolio variance for the unique fund F defined by the tangent portfolio and the one-fund theorem. Note that the portfolio weights sum to 1 and short selling (negative weights) are permissible.

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