Suppose you gathered the following return data on these types of investments over the previous three decades:
Investment Average Return Standard Deviation
Large-Company Stocks 14.3% 21.1%
Small-Company Stocks 21.2% 35.3%
Long-term corporate bonds 9.7% 10.4%
Long-term government bonds 7.5% 8%
U.S Treasury bills 5.6% 5.2%
During this 30-year period, what was the risk premium on large-company stocks?
6%
7.8%
9.3%
8.7%
6.5%
If you were to plot the distribution of returns for each of these investments, which investment would have the tightest distribution? In other words, which investment would have the most observations near the average and the narrowest distribution curve?
US Treasury Bills
Short-term government bonds
Long-term government bonds
Large-company stocks
small-company stocks
Which investment exposes the investor to the greatest chance of negative returns in a given year?
US Treasury Bills
Short-term government bonds
Long-term government bonds
Large-company stocks
small-company stocks
What is the probability of observing a return on large-company stocks that is greater than 35.4%? Assume a normal distribution.
About 16%
About 68%
About 32%
About 34%
About 95%