For both questions please show your work. Do not use excel: 9. You’ve observed t

Question

For both questions please show your work. Do not use excel:

9. You’ve observed the following returns on Crash-n-Burn Computer’s stock over the past five years: 7 percent, -13 percent, 21 percent, 34 percent, and 15 percent.

a. What was the arithmetic average return on Crash-n-Burn’s stock over this five-year period?

b. What was the variance of Crash-n-Burn’s returns over this period? The standard deviation?

10. For Problem 9, suppose the average inflation rate over this period was 3.5 percent and the average T-bill rate over the period was 4.2 percent.

a. What was the average real return on Crash-n-Burn’s stock?

b. What was the average nominal risk premium on the Crash-n-Burn’s stock?

Explanation / Answer

Arithmetic Return = (7% - 13% + 21% + 34% + 15%)/5

Arithmetic Return = (64%)/5

Arithmetic Return = 12.80%

Variance = ((7% - 12.80%)2 + (-13% - 12.80%)2 + (21% - 12.80%)2 + (34% - 12.80%)2 + (15% - 12.80%)2) / 4

Variance = (0.12208) / 4

Variance = 0.03052

Standard Deviation = (0.03052)0.5

Standard Deviation = 17.47%

Question 10

Avg. Real Return = ((1 + Stock Return)/ (1 + Average Inflation)) - 1

Avg. Real Return = ((1 + 12.80%)/ (1 + 3.5%)) - 1

Avg. Real Return = 8.99%

Avg. Nominal Risk Premium = Stock Return - Avg. T-Bill Rate

Avg. Nominal Risk Premium = 12.8% - 4.2%

Avg. Nominal Risk Premium = 8.6%

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