You’ve observed the following returns on Crash-n-Burn Computer’s stock over the

Question

You’ve observed the following returns on Crash-n-Burn Computer’s stock over the past five years: 20 percent, –12 percent, 17 percent, 20 percent, and 10 percent. Suppose the average inflation rate over this period was 1.7 percent and the average T-bill rate over the period was 4.6 percent. a. What was the average real return on Crash-n-Burn’s stock? (Round your answer to 2 decimal places. (e.g., 32.16)) Average real return % b. What was the average nominal risk premium on Crash-n-Burn’s stock? (Round your answer to 1 decimal place. (e.g., 32.1)) Average nominal risk %

Explanation / Answer

Average rate of return=Total return/Total time period

=(20-12+17+20+10)/5=11%

1.Average real return=(1+nominal rate)/(1+inflation rate)-1

=(1+0.11)/(1+0.017)-1

(1.11/1.017)-1

9.14%(Approx).

2.Average nominal risk premium=Average rate of return-Average T-bill rate

(11-4.6)

=6.4%

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