You\'ve observed the following returns on Crash-n-Burn Computer\'s stock over th

Question

You've observed the following returns on Crash-n-Burn Computer's stock over the past five years: 4 percent, -11 percent, 29 percent, 18 percent, and 14 percent. The average inflation rate over this period was 3.3 percent and the average T-bill rate was 3.75 percent. Requirement 1: What was the average real return on Crash-n-Burn's stock? (Do not round intermediate calculations.) (Click to select) Requirement 2: What was the average nominal risk premium on Crash-n-Burn's stock? (Do not round intermediate calculations.) (Click to select)

Explanation / Answer

1.Average real return=(Total returns/Total time period)

=(4-11+29+18+14)/5

=10.8%

Averge real return=(1+nominal rate)/(1+inflation rate)-1

=(1+0.108/(1+0.033))-1

=(1.108/1.033)-1

=7.26%(Approx).

2.

Average nominal risk premium=Average real return-Average inflation rate

=(10.8-3.75)

=7.05%

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