finance 14 Safar File Edit View History Bookmarks Window Help 4) Q, (91 Sun 10:0

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finance

14 Safar File Edit View History Bookmarks Window Help 4) Q, (91 Sun 10:05 AM Q. Chapter 10 Quiz Chttp:Iezto.nhecloud.mcgraw-hill.com/hm.tp Q C Google Go m EEEE App Google Maps wikipedia News 745 YouTube Popular Chapter 10 Quiz McGraw-Hill Connect l Student P Homework Help I Chegg.com Rodney Johnson 301: Principles of Finance (SPRING 2013): 301: Sec FINANCE Chapter 10 Quiz instructions I help submit assignment prev Question #4 (of 12 next save & exit You've observed the following returns on Crash-n-Burn Computer's stock over the past five years: 14 percent, -14 percent, 16 percent, 26 percent, and 10 percent. Suppose the average inflation rate over this period was 3.5 percent and the average T-bill rate over the period was 4.0 percent. a. What was the average real return on Crash-n-Burn's stock? (Round your answer to 2 decimal places. (e.g., 32.16) Average real return b. What was the average nominal risk premium on Crash-n-Burn's stock (Round your answer to 1 decimal place. (e.g., 32.1) Average nominal risk book & resources

Explanation / Answer

Avge Reqturn = (14%-14%+16%+26%+10%)/5 = 10.40%

r = IP + DRP +RP

Where

r = return on a security =10.4%

IP = inflation premium = 3.5%

DRP = default risk premium =4%

RP = risk premium =?

Putting values

10.4% = 3.5%+4%+RP

So RP = 10.4% - 7.5% = 2.9%

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