You\'ve observed the following returns on Crash-n-Burn Computer\'s stock over th

Question

You've observed the following returns on Crash-n-Burn Computer's stock over the past five years: 2 percent, -15 percent, 26 percent, 16 percent, and 13 percent. The average inflation rate over this period was 3.4 percent and the average T-bill rate was 4.6 percent. Requirement 1: What was the average real return on Crash-n-Burn's stock? (Do not round intermediate calculations.) (Click to select) Requirement 2: What was the average nominal risk premium on Crash-n-Burn's stock? (Do not round intermediate calculations.) (Click to select)

Explanation / Answer

Average return = (2%-15%+26%+16%+13%)/5

Average return = 8.40%

.

1.

Average real rate of return as per fisher equation:

Average real return = (1+Average return)/(1+Inflation rate)-1

Average real return = (1+8.4%)/(1+3.4%)-1

Average real return = 4.84%

2.

Average nominal risk premium = Average return - Risk free rate

Average nominal risk premium = 8.40%-4.60%

Average nominal risk premium = 3.80%

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