Series Arithmetic Mean 1) What was the arithmetic average annual return on large

Question

  Series

Arithmetic Mean

1) What was the arithmetic average annual return on large-company stocks in nominal terms? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

2) What was the arithmetic average annual return on large-company stocks in real terms? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Consider the following information on large-company stocks for a period of years.

Explanation / Answer

1. Arithmetic average annual return of large company stock in norminal terms is 14.1%

2. Arithmetic average annual return of large company stock in real terms has to be calculated by adjusting the inflation impact. The formula is given below

(1+R)=(1+r)*(1+h) where R is Nominal rate, r is real rate, h is inflation rate

r=1.097115-1

r=9.71% ie., Real rate of return is 9.71%

(1+R)=(1+r)*(1+h) where R is Nominal rate, r is real rate, h is inflation rate

(1+0.141)=(1+r)*(1+0.04) (1.141)/(1.04)=1+r 1.097115 = 1+r

r=1.097115-1

r=9.71% ie., Real rate of return is 9.71%

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