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 percent, -9 percent, 20 percent, 17 percent, and 10 percent. Suppose the average inflation rate over this period was 3.2 percent and the average T-bill rate over the period was 4.9 percent. past five years: 12 the average real risk-free rate over this time period? (Do not round intermediate calculations. What was Enter your answer as a percent rounded to 2 decimal places, e-g, 32.16) Average real risk-free rate What was the average real risk premium? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Average real risk premium

Explanation / Answer

1. Average real risk free rate = (( 1 + Nominal Treasury Bill Rate ) / ( 1 + Inflation Rate)) - 1

= (( 1 + 0.049) / ( 1 + 0.032)) - 1

=( 1.049 / 1.032 ) - 1

= 1.016473 - 1

=0.016473

= 1.65%

2. Average real risk premium = Average real return on stock - Average real risk free rate

= (12 + (-9) + 20 + 17 +10 ) / 5

= 50 / 5

= 10%

Therefore, Average real return on stock = (( 1 + 0.10) / (1 + 0.032)) - 1

= (1.10 / 1.032) - 1

= 1.06589 - 1

= 0.06589

= 6.589%

So, Average real risk premium = 6.589 - 1.65

= 4.94%

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