Attached are historical US equity and bond market returns. The objective of this exercise is to explore the historical risk-reward relationship of the equity and bond markets.
1. Plot the bond and stock market returns across time using a line chart.
2. Show the distribution of the stock market returns using a histogram.
3. Calculate the following statistics:
- the stock and bond markets mean and standard deviations
- the stock market's skewness and kurtosis
- the stock market's risk premium and Sharpe ratio
- On average, how much compensation for time does a US investor receive each year?
- On average, how much compensation for market risk a US investor receive each year?
- What are the implications of the stock market returns being negatively skewed?
- What are the implications of the stock market returns have positive kurtosis?
- What is the interpretation of the stock market's annual Sharpe ratio? How can we use this as a benchmark if we're looking at the performance of other assets?