You’ve observed the following returns on Mary Ann Data Corporation’s stock over
ID: 2709356 • Letter: Y
Question
You’ve observed the following returns on Mary Ann Data Corporation’s stock over the past five years: 10 percent, –10 percent, 17 percent, 22 percent, and 10 percent. Suppose the average inflation rate over this period was 1.5 percent, and the average T-bill rate over the period was 3.0 percent.
What was the average real return on Mary Ann’s stock? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
What was the average nominal risk premium on Mary Ann’s stock? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
a.What was the average real return on Mary Ann’s stock? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Explanation / Answer
Answer :
Answer A. Average real Return on Mary Ann's Stock
Year Returns
1 10.00 %
2 - 10.00 %
3 17 %
4 22 %
5 10 %
Average = 10 - 10 + 17 + 22 + 10 / 5 = 9.8
Average real return = 9.8 % - 1.5 % = 8.3 %
Answer B.
T - bill = 3.0
Average Nominal Risk premium = Average - T bill
= 9.8 % - 3 % = 6.8 %
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