You’ve observed the following returns on Yasmin Corporation’s stock over the pas

Question

You’ve observed the following returns on Yasmin Corporation’s stock over the past five years: 17 percent, –15 percent, 19 percent, 29 percent, and 10 percent. Suppose the average inflation rate over this period was 2.6 percent and the average T-bill rate over the period was 4.3 percent.

a. What was the average real return on the company's stock? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

b. What was the average nominal risk premium on the company's stock? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place, e.g., 32.1.)

Explanation / Answer

average return of last 5 years = (17 + (-15) + 19 + 29 + 10)/5 = 12%

average inflation rate = 2.6%, risk free rate = 4.3%

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

average real return= (1 +0.12)/(1+0.026) - 1 = 0.0916 = 9.16%

b. average nominal risk premium = nominal rate - risk free rate = 12% - 4.3% = 7.7%

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