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: -25.5 percent, 14.0 percent, 31.0 percent, 2.5 percent, and 21.5 percent. The average inflation rate over this period was 3.25 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).) 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).)

Explanation / Answer

Average Inflation Rate = 3.25% Average T Bill Rate = 4.3% Average Rate of Return = (25.5+14+31+2.5+21.5)% 5 = 18.9 % A, Average Real Rate of Return = 1+Nominal Rate -1 1+ inflation rate = 1+ 18.9% -1 1+3.25% = 1+0.189 -1 1+.0325 = 0.151574 = 15.15738 % B. Average Nominal Risk Premium = Investment Return-Risk Free Return = 18.9% - 4.3% = 14.6 %

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