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: –29.1 percent, 16.4 percent, 35.8 percent, 3.7 percent, and 22.7 percent. The average inflation rate over this period was 3.37 percent and the average T-bill rate over the period was 4.3 percent.

1) 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).)

2) 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

Return of last five year on Doyscher Corporation’s stock is given. So first of all calculate average return on stock over last five year as calculated below:

Average return = [(-29.10%) + 16.4% +35.8% + 3.7% + 22.7%] / 5

                         = 9.90%

Average return on Doyscher Corporation’s stock over last five year is 9.90%.   

Average Inflation rate over last five year = 3.37%   

So, average real return on Crash-n-Burn’s stock is calculated below:

Real return = nominal return – Inflation rate

                   = 9.90% - 3.7%

                   = 6.2%.

Hence, average real return on Doyscher Corporation’s stock over last five year is 6.20%.     

Again risk free rate = 4.3%

So nominal market risk premium on investment in stock is calculated below:

Risk Premium = nominal return – Risk free rate

                        = 9.90% - 4.30%

                        = 5.60%

Hence, nominal market risk premium on investment in stock is 5.60%.

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