You?ve observed the following returns on Staverosky Corporation?s stock over the

Question

You?ve observed the following returns on Staverosky Corporation?s stock over the past five years: -28.2 percent, 15.8 percent, 34.6 percent, 3.4 percent, and 22.4 percent. The average inflation rate over this period was 3.34 percent and the average T-bill rate over the period was 4.3 percent. Requirement 1: What was the average real risk-free rate over this time period? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).) Average real risk-free rate % Requirement 2: What was the average real risk premium? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).) Average real risk premium %

Explanation / Answer

1. Average Real Risk Free Rate = (1 + Risk free rate)/(1 + inflation rate) - 1 = (1 + 0.043)/(1 + 0.0334) - 1 = 0.93%

2. Average Company Return = (-28.2 + 15.8 + 34.6 + 3.4 + 22.4) / 5 = 9.6%

Real Return = (1 + 0.096)/(1 + 0.0334) - 1 = 6.06%

Average Real Risk Premium = 6.06 - 0.93 = 5.13%

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