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: –26.4 percent, 14.6 percent, 32.2 percent, 2.8 percent, and 21.8 percent. The average inflation rate over this period was 3.28 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).)

You’ve observed the following returns on Doyscher Corporation’s stock over the past five years: –26.4 percent, 14.6 percent, 32.2 percent, 2.8 percent, and 21.8 percent. The average inflation rate over this period was 3.28 percent and the average T-bill rate over the period was 4.3 percent.

Explanation / Answer

Average nominal return:

= (-26.4%+14.6%+32.2%+2.8%+21.8%)÷4

= 9%

(1+Nominal rate) = (1+Real rate)×(1+Inflation rate)

Average nominal rate = Average real rate+Average inflation rate

Average real rate = 9%-3.28%

= 5.72%

Average nominal risk premium:

= Average nominal return-Average T bill rate

= 9%-4.3%

= 4.7%

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