19.01% 13.72% 8.75% 12.46% 13.84% Large company stocks 18.36 1.25 9.11 19.41 7.84 5.90 17.60 18.20 Long-term government 3.98 4.60 3.59 0.25 1.14 6.63 11.50 8.60 Intermediate-term government 3.77 3.91 1.70 1.11 3.41 6.11 12.01 7.74 Treasury-bills 3.56 0.30 0.37 1.87 3.89 6.29 9.00 5.02 Inflation 1.00 2.04 5.36 2.22 2.52 7.36 5.10 2.93   *Based on the period 1926 1929. Source: Data in Table 5.2.   28. Input the data from the table into a spreadsheet. Compute the serial correlation in decade returns for each asset class and for inflation. Also find the correlation between the returns of various asset classes. What do the data indicate? 29. Convert the asset returns by decade presented in the table into real rates. Repeat the analysis of problem 28 for the real rates of return.         SOLUTIONS 1. a. The first term will be wD wD 2 , since this is the element in the top corner of TO CONCEPT the matrix ( 2 ) times the term on the column border (wD) times the term on the C H E C K S row border (wD). Applying this rule to each term of the covariance matrix results in the sum w2 2 wDwECov(rE,rD) wEwDCov(rD, rE) w2 2 , which is the D D E E same as equation 8.2, since Cov(rE,rD) Cov(rD, rE). II. Portfolio Theory 8. Optimal Risky Portfolio The McGraw−Hill Companies, 2001