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: 3 percent, -11 percent, 26 percent, 13 percent, and 13 percent. The average inflation rate over this period was 3.8 percent and the average T-bill rate was 4.45 percent.

What was the average real return on Crash-n-Burn’s stock? (Do not round intermediate calculations.)

What was the average nominal risk premium on Crash-n-Burn’s stock? (Do not round intermediate calculations.)

You’ve observed the following returns on Crash-n-Burn Computer’s stock over the past five years: 3 percent, -11 percent, 26 percent, 13 percent, and 13 percent. The average inflation rate over this period was 3.8 percent and the average T-bill rate was 4.45 percent.

Explanation / Answer

Average Nominal return = [3 -11 + 26+13+13 ]/ 5 = 44/5 = 8.8%

Avergae real return = [(1+Nominal return )/(1+Inflation return ) ] -1

                        = [(1+.088)]/[(1+.038)] - 1

                         = [1.088/1.038] -1

                         = 1.0482 -1

                          = .0482 or 4.82%

correct option is "C"

2)Average nominal risk premium = 8.8 - 4.45 = 4.35%

correct option is "D" - [Approx to 4.30% ]

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