Question

The following table contains the historic returns from a portfolio consisting of large stocks and a portfolio consisting of long-term Treasury bonds over the last 20 years. T-bills returns represent risk-free returns. Analyze the risk-return trade-off that would have characterized these portfolios. The following dataset is also available in Excel format in Module 3 Resources on Canvas. Returns in the dataset are in percents. For example, 31.33 means 31.33% per year.

Year	Large Stock	Long-Term T-Bonds	T-Bills
1997	31.33	11.312	5.26
1998	24.27	13.094	4.86
1999	24.89	-8.4734	4.68
2000	-10.82	14.4891	5.89
2001	-11.00	4.0302	3.78
2002	-21.28	14.6641	1.63
2003	31.76	1.2778	1.02
2004	11.89	5.1862	1.20
2005	6.17	3.1030	2.96
2006	15.37	2.2713	4.79
2007	5.50	9.6431	4.67
2008	-36.92	17.6664	1.47
2009	29.15	-5.8278	0.10
2010	17.80	7.4457	0.12
2011	1.01	16.6015	0.04
2012	16.07	3.5862	0.06
2013	35.18	-6.9025	0.03
2014	11.37	10.1512	0.02
2015	-0.19	1.0665	0.01
2016	13.41	0.7039	0.19

a. Estimate the annual risk premium of large stocks and T-bonds, respectively.

b. Estimate the annual volatility of large stocks and long-term T-bonds, respectively.

c. Estimate the Sharpe ratio of large stocks and long-term T-bonds, respectively.

d. Now assume that you have always invested half of your wealth in the stock and the other half in the T-bonds. Estimate the Sharpe ratio of your portfolio.

Answer 1