chap 12. You\'ve observed the following returns on Crash-n-Burn Computer\'s stoc

Question

chap 12.

You've observed the following returns on Crash-n-Burn Computer's stock over the past five years: 9 percent, -12 percent, 21 percent, 31 percent, and 18 percent. Suppose the average inflation rate over this period was 3.4 percent and the average T-bill rate over the period was 4.5 percent. What was the average nominal risk premium on Crash-n-Burn's stock? (Enter your answer as a percentage, omit the "%" sign in your response, and round your answer to 2 decimal places. For example, 0.12345 or 12.345% should be entered as 12.35)

Explanation / Answer

Average nominal return (%) = (9 - 12 + 21 + 31 + 18) / 5 = 67 / 5 = 13.4%

Average nominal risk premium = Average nominal return - Average T-bill return

= 13.4% - 4.5%

= 8.90%

NOTE: Inflation rate is ignored while calculating any nominal value.

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