You\'ve observed the following returns on Doyscher Corporation\'s stock over the

Question

You've observed the following returns on Doyscher Corporation's stock over the past five years: -12 percent, 21 percent, 27 percent, 6 percent, and 17 percent. The average inflation rate over this period was 3.2 percent and the average T-bill rate over the period was 4.3 percent. Required: 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).) Average real return 4.84% 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).) Average nominal risk premium 3.9%

Explanation / Answer

a.Average Real Rate on the stock

Average Annual return for last five years =( -12+21+27+6+7)/5 years = 49/5 = 9.8%

Given Average annual Inflation = 3.2%

Average real rate on stock = Average Annual return - Average annual Inflation

=9.8-3.2 =6.6%

b.Average nominal risk premium on stock

Given,Average T Bill Rate over the period is 4.3% i.e Nominal Interest Rate

Average nominal risk premium = Avg nominal Interest rate - Avg Inflation rate = 4.3 - 3.2 = 1.1%

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