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

Question

You’ve observed the following returns on Staverosky Corporation’s stock over the past five years: –27.0 percent, 15.0 percent, 33.0 percent, 3.0 percent, and 22.0 percent. The average inflation rate over this period was 3.30 percent and the average T-bill rate over the period was 4.3 percent. Requirement 1: What was the average real risk-free rate over this time period? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).) Average real risk-free rate % Requirement 2: What was the average real risk premium? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).) Average real risk premium %

Explanation / Answer

Calculation of Average nominal return Year Nominal Return 1 27% 2 15% 2 33% 4 3% 5 22% Average 20.00% Requirement 1 Risk Free rate = [(1+nominal risk free rate of return) / (1+inflation rate)] -1                          =[(1+4.3%)/(1+3.3%)]-1                          =0.97% Requirement 2 Risk Premium = [(1+nominal risk premium) / (1+inflation rate)] -1                          =[(1+15.7%)/(1+3.3%)]-1                          =12.00% Note 1: Nominal Risk Premium = 20%-4.3%                                                          =15.7%

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