21 May WHAT HAPPENS TO THE VALUE OF BONDS AND T-BILLS IN CRISIS?
Arithmetic mean returns exceed geometric mean returns by varying amounts. On what does this difference depend?
2. If you are making long-term assessments, which is more relevant: arithmetic mean or geometric mean? Why?
Geometric mean is more relevant to make long-term assessments.
3. We often use t-bills as the “risk-free asset,” but in fact the returns on t-bills also have a standard deviation. Are we making a mistake? Are t-bills in fact not riskless?
4. One possible source of risk for holders of t-bills is inflation. Explain.
Because inflation affects the purchasing power of the prodeeds from the t-bills.
Correlation of Asset Categories
5. Both long-term treasury bonds and t-bills are negatively correlated with (a) world stocks and (b) both large and small US stocks, at least for the period since 2000. Provide an explanation. Hint: Stock prices go down in a crisis. What happens to the value of bonds and t-bills in crisis?
6. The 50/50 mix of large stocks and LT treasury bonds had an SD of the 50/50 mix much lower than the SD of either of the components? Why
7. With which major asset category does inflation have the highest correlation? Can you provide a reason for this correlation?
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