You’ve observed the following returns on Crash-n-Burn Computer’s stock over the
ID: 2730480 • Letter: Y
Question
You’ve observed the following returns on Crash-n-Burn Computer’s stock over the past five years: 10 percent, –11 percent, 18 percent, 19 percent, and 10 percent. Suppose the average inflation rate over this period was 2.2 percent and the average T-bill rate over the period was 4.7 percent.
What was the average real return on Crash-n-Burn’s stock? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
What was the average nominal risk premium on Crash-n-Burn’s stock? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place, e.g., 32.1.)
You’ve observed the following returns on Crash-n-Burn Computer’s stock over the past five years: 10 percent, –11 percent, 18 percent, 19 percent, and 10 percent. Suppose the average inflation rate over this period was 2.2 percent and the average T-bill rate over the period was 4.7 percent.
Explanation / Answer
Crash & Burn Details Year 1 Year 2 Year 3 Year 4 Year 5 Total Nominal return rate 10.0% -11.0% 18.0% 19.0% 10.0% Average Inflation rate = 2.2% 2.2% 2.2% 2.2% 2.2% Real Return rate=[(1+nominal rate)/(1+inflation)] -1 7.63% -12.92% 15.46% 16.44% 7.63% 34.25% Nominal Risk free rate = 4.7% 4.7% 4.7% 4.7% 4.7% Nominal Risk premium=Nominal Return-Risk free rate= 5.3% -15.7% 13.3% 14.3% 5.3% 22.50% Average Real Return Rate=34.25%/5=6.85% Average Nominal Risk Premium =22.5%/5=4.5%
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