You’ve observed the following returns on Crash-n-Burn Computer’s stock over the

Question

You’ve observed the following returns on Crash-n-Burn Computer’s stock over the past five years: 10 percent, –11 percent, 18 percent, 19 percent, and 10 percent. Suppose the average inflation rate over this period was 2.2 percent and the average T-bill rate over the period was 4.7 percent.

What was the average real return on Crash-n-Burn’s stock? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

What was the average nominal risk premium on Crash-n-Burn’s stock? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place, e.g., 32.1.)

You’ve observed the following returns on Crash-n-Burn Computer’s stock over the past five years: 10 percent, –11 percent, 18 percent, 19 percent, and 10 percent. Suppose the average inflation rate over this period was 2.2 percent and the average T-bill rate over the period was 4.7 percent.

Explanation / Answer

Solution :

a) Average real return = (1+ nominal rate /(1+inflation rate)) - 1

hence inflation rate = 2.2%

average nominal return = (10-11+18+19+10)/5 = 46/5 = 9.2%

Hence average real return = (1+.092)/(1+.022) -1

= .06849 = 6.85%

b) Average nominal risk premium = return - risk free rate = 6.85%- 4.7% = 2.15%

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.