Problem 11-1 Stock Market History (LO1) 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. Average Premium (Extra Portfolio Treasury bills Treasury bonds Common stocks Average Annual Rate of Return (%) return versus Treasury bills) (%) 3.7 5.4 11.5 1.7 7.8 Standard deviation of returns, 1900-2020. Portfolio Treasury bills Long-term government bonds Common stocks Standard Deviation (%) 2.8 8.9 19.5 a. What was the average rate of return on large U.S. common stocks from 1900 to 2020? b. What was the average risk premium on large stocks? c. What was the standard deviation of returns on common stocks? Note: Enter your answer as a percent rounded to 1 decimal place. a. Average rate of return b. Average risk premium c. Standard deviation of returns % % %

Select all that are true with respect to historical data on risk and return in the U.S. financial markets since about 1926, Group of answer choices A portfolio of small stocks has earned higher returns than large stocks, with less risk A portfolio of small stocks has earned higher returns that large stocks, with higher risk Stocks have outperformed government bonds, albeit with higher risk With respect to a diversified stock portfolio, the longer the holding period, the higher the risk. With respect to a diversified stock portfolio, the longer the holding period, the lower the risk.

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 %

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TABLE 5.3 Risk and return of investments in major asset classes, 1927-2018 Average Risk premium Standard deviation max min T-bills 3.38 na 3.12 14.71 -0.02 T-bonds 5.83 2.45 11.59 41.68 -25.96 Stocks 11.72 8.34 20.05 57.35 -44.04

Which one of the following categories has the widest frequency distribution of returns for the period 1926-2014?   Multiple Choice   Small-company stocks   U.S. Treasury bills   Long-term government bonds   Inflation   Large-company stock

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

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[Related to Solved Problem 5.2b] Use the data on Treasury securities in the following table to answer the question: 1 year 0.39% Date 2 year 3 year 03/05/2010 0.88% 1.56% Source: U.S. Department of the Treasury. Assuming that the liquidity premium theory is correct, on March 5, 2010, what did investors expect the interest rate to be on the one-year Treasury bill two years from that date if the term premium on a two-year Treasury note was 0.04% and the term premium on a three-year Treasury note was 0.06%? The expected interest rate is %. (Round your response to two decimal places.)

Question 4 Which of the following is the correct ranking for the bond price? Bond Coupon Rate A B C A>B>C B> C>A C> A > B 6% 6% 7% Maturity (years) 8 8 7 YTM 6.5% 7% 6.5%