The inflation rate in the United States has averaged 3% a year since 1900. Use t

Question

The inflation rate in the United States has averaged 3% a year since 1900. Use the data in the table below to answer the following question: Average rates of return on Treasury bills, government bonds, and common stocks, 1900–2015.

What was the average real rate of return on Treasury bills, Treasury bonds, and common stocks in that period? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

Portfolio Average Annual
Rate of Return (%) Average Premium (Extra return versus Treasury bills) (%) Treasury bills 3.8 Treasury bonds 5.3 1.5 Common stocks 11.4 7.6

What was the average real rate of return on Treasury bills, Treasury bonds, and common stocks in that period? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

Explanation / Answer

1)

treasury bill:

Nominal rate = 3.8%

inflation rate = 3%

(1+real rate of return) = (1+nominal rate) / (1+ inflation rate)

(1+real rate of return) = (1+0.038) / (1+0.03)

real rate of return = 0.7766%

2)

Treasury bonds:

(1+real rate of return) = (1+nominal rate) / (1+ inflation rate)

(1+real rate of return) = (1+0.053) / (1+0.03)

real rate of return = 2.233%

3)

Common stocks:

(1+real rate of return) = (1+nominal rate) / (1+ inflation rate)

(1+real rate of return) = (1+0.114)/(1+0.03)

real rate of return = 8.155%

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