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23 Nov 2019

The fact that historical returns on Treasury bills are less volatile than common stock returns indicates that:

A. the variance of Treasury bill returns is zero.
B. the standard deviation of Treasury bill returns is negative.
C. the real return on Treasury bills has been zero.
D. common stocks should offer a higher return than Treasury bills.

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Trinidad Tremblay
Trinidad TremblayLv2
1 Jan 2019
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Related questions

Suppose we have the following Treasury bill returns andinflation rates over an eight year period: Suppose we have thefollowing Treasury bill returns and inflation rates over an eightyear period: Year Treasury Bills Inflation 1 7.70% 9.20% 2 8.4612.88 3 6.31 7.41 4 5.48 5.24 5 5.89 7.17 6 8.11 9.52 7 11.10 13.848 12.70 13.19 a. Calculate the average return for Treasury billsand the average annual inflation rate for this period. (Do notround intermediate calculations. Enter your answers as a percentrounded to 2 decimal places, e.g., 32.16.) Treasury bills 8.21 %Inflation 9.80 % b. Calculate the standard deviation of Treasurybill returns and inflation over this period. (Do not roundintermediate calculations. Enter your answers as a percent roundedto 2 decimal places, e.g., 32.16.) Treasury bills 2.54 % Inflation2.98 % c. What was the average real return for Treasury bills overthis period? (Negative amount should be indicated by a minus sign.Do not round intermediate calculations. Enter your answer as apercent rounded to 2 decimal places, e.g., 32.16.) Average realreturn %

Over the past 84 years, we have observed that investments with the highest average annual returns also tend to have the highest standard deviations of annual returns. This observation supports the notion that there is a positive correlation between risk and return. Which of the following answers correctly ranks investments from highest to lowest risk (and return), where the security with the highest risk is shown first, the one with the lowest risk last?
a. U.S. Treasury bills, long-term government bonds, long-term corporate bonds, small-company stocks, large-company stocks.
b. Small-company stocks, large-company stocks, long-term corporate bonds, long-term government bonds, U.S. Treasury bills.
c. Large-company stocks, small-company stocks, long-term corporate bonds, U.S. Treasury bills, long-term government bonds.
d. Large-company stocks, small-company stocks, long-term corporate bonds, long-term government bonds, U.S. Treasury bills.
e. Small-company stocks, long-term corporate bonds, large-company stocks, long-term government bonds, U.S. Treasury bills.

explain your answer

Consider the following table for an eight-year period:
Year T-bill return Inflation
Year 1 7.45% 8.55%
Year 2 8.84 12.18
Year 3 6.03 6.78
Year 4 5.87 5.02
Year 5 5.61 6.54
Year 6 8.44 8.86
Year 7 10.72 13.13
Year 8 12.90 12.36
Requirement 1:

Calculate the average return for Treasury bills and the average annual inflation rate (consumer price index) for this period. (Do not round intermediate calculations. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).)
Average return for Treasury bills %
Average annual inflation rate %
Requirement 2:

Calculate the standard deviation of Treasury bill returns and inflation over this time period. (Do not round intermediate calculations. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).)
Standard deviation of Treasury bills %
Standard deviation of inflation %
Requirement 3:
(a)

Calculate the real return for each year. (Negative amounts should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).)
Year Real return
Year 1 %
Year 2 %
Year 3 %
Year 4 %
Year 5 %
Year 6 %
Year 7 %
Year 8 %
(b)

What is the average real return for Treasury bills? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer as a percentage
rounded to 2 decimal places (e.g., 32.16).)
Average real return for Treasury bills %

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