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.

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: –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.

Explanation / Answer

Answer:(a) Average Real Return:

Average return =(-28.8+16.2+35.4+3.6+22.6)/5=9.8%

To calculate the average real return, we can use the average return of the asset, and the average inflation rate in the Fisher equation. Doing so, we find:

(1 + R) = (1 + r)(1 + h)
= (1.0980 / 1.0360) - 1
= .0598, or 5.98%

Answer:(b) And to calculate the average real risk premium, we can subtract the average risk-free rate from the average real return. So, the average real risk premium was:

real return - risk free rate
= 5.98% - .67% = 5.31%

We can find the average real risk-free rate using the Fisher equation. The average real risk-free rate was:

(1 + R) = (1 + r)(1 + h)
= (1.0430 / 1.0360) - 1
= .0067, or .67%

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