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: 5 percent, -12 percent, 28 percent, 20 percent, and 14 percent. The average inflation rate over this period was 4 percent and the average T-bill rate was 5.6 percent. Requirement 1: What was the average real return on Crash-n-Burn's stock? (Do not round intermediate calculations.) (Click to select) v 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=Total return/Total time period

=(5-12+28+20+14)/5=11%

1.Average real return=(1+nominal rate)/(1+inflation rate)-1

=(1+0.11)/(1+0.04)-1

=(1.11/1.04)-1

which is equal to

=6.73%(Approx).

2.Average nominal risk premium=Average return-Average T-bill rate

(11-5.6)

=5.4%

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