Consider the following information on large-company stocks for a period of years

Question

Consider the following information on large-company stocks for a period of years. Series Arithmetic Mean Large-company stocks 13.1 % Small-company stocks 16.4 Long-term corporate bonds 6.2 Long-term government bonds 6.1 Intermediate-term government bonds 5.6 U.S. Treasury bills 3.8 Inflation 3.6 Required: (a) What was the arithmetic average annual return on large-company stocks in nominal terms? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) Nominal return % (b) What was the arithmetic average annual return on large-company stocks in real terms? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Explanation / Answer

Solution:

a) What was the arithmetic average annual return on large-company stocks in nominal terms?

Ans) The arithmetic average annual return on large-company stocks in nominal terms is the state returns viz., 13.1%

b) What was the arithmetic average annual return on large-company stocks in real terms?

Ans) The real return is calculated by using Fisher equation:

(1+Nominal rate) = (1+Real rate)×(1+Inflation rate)

(1+13.1%) = (1+Real rate)×(1+3.6%)

(1+Real rate)×(1+3.6%) = (1+13.1%)

(1+Real rate)×1.036 = 1.131

1.036 + 1.036 R = 1.131

1.036 R = 1.131 - 1.036

1.036 R = 0.095

R = 0.095 / 1.036

R = 0.09169 or 9.16%

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