Question

Suppose we have the following Treasury bill returns and inflation rates over an eight year period: Suppose we have the following Treasury bill returns and inflation rates over an eight year period: Year Treasury Bills Inflation 1 7.70% 9.20% 2 8.46 12.88 3 6.31 7.41 4 5.48 5.24 5 5.89 7.17 6 8.11 9.52 7 11.10 13.84 8 12.70 13.19 a. Calculate the average return for Treasury bills and the average annual inflation rate for this period. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Treasury bills 8.21 % Inflation 9.80 % b. Calculate the standard deviation of Treasury bill returns and inflation over this period. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Treasury bills 2.54 % Inflation 2.98 % c. What was the average real return for Treasury bills over this period? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Average real return %

Answer 1

Year	Treasury bill return	Inflation rate
1	7.7	9.2
2	8.46	12.88
3	6.31	7.41
4	5.48	5.24
5	5.89	7.17
6	8.11	9.52
7	11.1	13.84
8	12.7	13.19
Average return = sum of treasury bill return/number of years   average inflation rate = sum of inflation rate/number of years	8.219	9.806
sum of treasury bill return / inflation rate	65.75	78.45
number of years	8	8
Year	Treasury bill return	treasury bill return-average return	square of (treasury bill return-average return)
1	7.7	-0.51	0.2601
2	8.46	0.25	0.0625
3	6.31	-1.9	3.61
4	5.48	-2.73	7.4529
5	5.89	-2.32	5.3824
6	8.11	-0.1	0.01
7	11.1	2.89	8.3521
8	12.7	4.49	20.1601
Average return = sum of treasury bill return/number of years   average inflation rate = sum of inflation rate/number of years	8.21
sum of square of (treasury bill return-average return)			45.2901
standard deviation = square root of (sum of square root of treasury bill return-average return		(45.2514/8)^(1/2)	2.378324
standard deviation =Using standard deviation function in MS excel =stdevp(cell reference year 1 : cell reference year 8)	2.379
Year	inlation rate	inflation rate-average inflation rate	square of (treasury bill return-average return)
1	9.2	-0.6	0.36
2	12.88	3.08	9.4864
3	7.41	-2.39	5.7121
4	5.24	-4.56	20.7936
5	7.17	-2.63	6.9169
6	9.52	-0.28	0.0784
7	13.84	4.04	16.3216
8	13.19	3.39	11.4921
Average return = sum of treasury bill return/number of years   average inflation rate = sum of inflation rate/number of years	9.800
sum of square of (treasury bill return-average return)			71.1611
standard deviation = square root of (sum of square root of treasury bill return-average return		(71.1611/8)^(1/2)	2.98
standard deviation =Using standard deviation function in MS excel =stdevp(cell reference year 1 : cell reference year 8)	2.98
average real rate of return	average treasury bill return-average inflation rate	8.21-9.8	-1.59