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: 12 percent, –12 percent, 19 percent, 24 percent, and 10 percent. Suppose the average inflation rate over this period was 2.5 percent, and the average T-bill rate over the period was 3.2 percent. a. 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.) Average real return _____________% b. 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.) Average nominal risk premium ____________%

Explanation / Answer

a. the average real return on the stock = Average return (12-12+19+24+10) / 5 - inflation rate 2.5

=10.60 - 2.5= 8.10%

b. the average nominal risk premium on the stock= Average return (12-12+19+24+10) / 5 - T-bill rate 3.2

=10.60 - 3.2 = 7.40%

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