Risk Management

Description

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.

Directions

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:


Questions

  1. On average, how much compensation for time does a US investor receive each year?
  2. On average, how much compensation for market risk a US investor receive each year?
  3. What are the implications of the stock market returns being negatively skewed?
  4. What are the implications of the stock market returns have positive kurtosis?
  5. 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?

Solutions