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: –28.8 percent, 16.2 percent, 35.4 percent, 3.6 percent, and 22.6 percent. The average inflation rate over this period was 3.36 percent and the average T-bill rate over the period was 4.3 percent.

1. What was the average real return on the stock?

2. What was the average nominal risk premium on the stock?

You’ve observed the following returns on Doyscher Corporation’s stock over the past five years: –28.8 percent, 16.2 percent, 35.4 percent, 3.6 percent, and 22.6 percent. The average inflation rate over this period was 3.36 percent and the average T-bill rate over the period was 4.3 percent.

1. What was the average real return on the stock?

2. What was the average nominal risk premium on the stock?

Explanation / Answer

1. the average real return on the stock = (–28.8 % + 16.2% + 35.4 % + 3.6% + 22.6 %) / 5 = 9.8%

2. the average nominal risk premium on the stock = (1 + Average real return on stock)* ( 1 + inflation rate) - 1

= ( 1 + 0.098)* (1 + 0.0336) - 1 = 13.5%

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