You’ve observed the following returns on SkyNet Data Corporation’s stock over th

Question

You’ve observed the following returns on SkyNet Data Corporation’s stock over the past five years: 10 percent, –11 percent, 18 percent, 19 percent, and 10 percent. Suppose the average inflation rate over this period was 2.2 percent, and the average T-bill rate over the period was 4.7 percent.

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

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

You’ve observed the following returns on SkyNet Data Corporation’s stock over the past five years: 10 percent, –11 percent, 18 percent, 19 percent, and 10 percent. Suppose the average inflation rate over this period was 2.2 percent, and the average T-bill rate over the period was 4.7 percent.

Explanation / Answer

Answer: To find the average return, we sum all the returns and divide by the number of returns, so:

Arithmetic average return = (10% +(-11%) + 18% +19% +10%)/5

Arithmetic average return =9.20%

(a) To calculate the average real return, we can use the average return of the asset, and the average inflation rate in the Fisher equation. Doing so, we find:

(1 + R ) = (1 + r )(1 + h ) = (1.0920 / 1.022) - 1 = 6.85%

(b) The average risk premium is simply the average return of the asset, minus the average risk-free rate, so, the average risk premium for this asset would be:

= .0920 - .047 = 4.50%

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