?You’ve observed the following returns on Doyscher Corporation’s stock over the
ID: 2768353 • Letter: #
Question
?You’ve observed the following returns on Doyscher Corporation’s stock over the past five years: –28.5 percent, 16.0 percent, 35.0 percent, 3.5 percent, and 22.5 percent. The average inflation rate over this period was 3.35 percent and the average T-bill rate over the period was 4.3 percent. Required: (a) What was the average real return on the stock? (Do not round intermediate calculations. Enter your answer as a percentage 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. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) Average nominal risk premium%
You've observed the following returns on Doyscher Corporation's stock over the past five years: -28.5 percent, 16.0 percent, 35.0 percent, 3.5 percent, and 22.5 percent. The average inflation rate over this period was 3.35 percent and the average T-bill rate over the period was 4.3 percent. Required (a) What was the average real return on the stock? (Do not round intermediate calculations. Enter your answer as a percentage 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. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) Average nominal risk premiunmExplanation / Answer
Average nominal return = sum of return / no. of return
= ( -28.50%+16%+35%+3.50%+22.50%)/5
= 48.50%/5
= 9.70%
Average real return = (average nominal return – average inflation)/ (1+ average inflation)
= (0.0970 – 0.035)/(1+0.035)
= 0.062/1.035
= 5.99%
Average nominal risk premium = average nominal return – risk free rate
= 9.70% - 4.30%
= 5.40%
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