Problem 10-11 Calculating Real Rates [LO 1] You’ve observed the following return

Question

Problem 10-11 Calculating Real Rates [LO 1]

You’ve observed the following returns on Doyscher Corporation’s stock over the past five years: –27.9 percent, 15.6 percent, 34.2 percent, 3.3 percent, and 22.3 percent. The average inflation rate over this period was 3.33 percent and the average T-bill rate over the period was 4.3 percent.

What was the average real risk-free rate over this time period? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

What was the average real risk premium? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

You’ve observed the following returns on Doyscher Corporation’s stock over the past five years: –27.9 percent, 15.6 percent, 34.2 percent, 3.3 percent, and 22.3 percent. The average inflation rate over this period was 3.33 percent and the average T-bill rate over the period was 4.3 percent.

Explanation / Answer

returns of Doyscher corporations stock over the past 5 years.

year 1 =-27.9% year 2 = 15.6% year 3 =34.2 year 4 =3.3% year 5 =22.3%

so the average returns = -27.9+15.6+34.2+3.3+22.3=47.5%/5=9.5%

so the average real risk free rate = formula (1+nominal risk free rate)/(1+Inflation rate)-1

so average nominal risk free rate =9.5%

average iflation rate =3.33%

(1+0.095)/(1+0.033)-1 =>1.095/1.033 -1 => 1.060-1=0.60 or 6%

Average risk free rate =6%

average risk premium= average nominal risk free rate - average real risk free rate= 9.5-6=3.5%

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