You’ve observed the following returns on Doyscher Corporation’s stock over the p

Question

You’ve observed the following returns on Doyscher Corporation’s stock over the past five years: –29.7 percent, 16.8 percent, 36.6 percent, 3.9 percent, and 22.9 percent. The average inflation rate over this period was 3.39 percent and the average T-bill rate over the period was 4.3 percent.

What was the average real return on the stock? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

What was the average nominal risk premium on the stock? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Explanation / Answer

a)

Arithmatic Average Return = (-29.7+16.8+36.6+3.9+22.9)/5

Arithmatic Average Return = 10.10%

Average real return = (1+ Average Stock Return )/(1+Inflation rate) - 1

Average real return = (1+10.10%)/(1+3.39%) - 1

Average real return = 6.49%

b)

Average nominal risk premium on the stock = Average Stock Return - Risk free rate

Average nominal risk premium on the stock = 10.10%-4.3%

Average nominal risk premium on the stock = 5.80%

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