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: 7 percent, -12 percent, 11 percent, 38 percent, and 14 percent.

Required:

a. The arithmetic average return on Crash-n-Burn's stock over this five year period was percent. (Do not include the percent sign (%). Round your answer to 2 decimal places. (e.g., 32.16))

b.
Suppose the average inflation rate over this time period was 3.5 percent and the average T-bill rate over the period was 4.2 percent. The average real return on Crash-n-Burn's stock was percent and the average nominal risk premium on Crash-n-Burn's stock was percent. (Do not include the percent signs (%). Round your answers to 2 decimal places. (e.g., 32.16))

Explanation / Answer

The average return on the five year period = ( 7 + -12 + 11 + 38 + 14) / 5 = 11.60 (1 + average real return) * (1 + average inflation) = (1+ average nominal return) Therefore, the average real return = (1+average nominal return) / (1+average inflation) -1 = (1+0.1160) / (1+0.035) - 1 = 7.83 Average nominal risk premium = Average nominal return on stock - Average risk free rate = 11.60 - 4.2 = 7.40

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.