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: 17 percent, –15 percent, 19 percent, 29 percent, and 10 percent. Suppose the average inflation rate over this period was 2.6 percent and the average T-bill rate over the period was 4.3 percent.

a. What was the average real return on Crash-n-Burn’s stock? (Do not round intermediate calculations. 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 Crash-n-Burn’s stock? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place, e.g., 32.1.)

Average nominal risk premium:

Explanation / Answer

Calculate average nominal taking the arithmetic average.

Average Return = (17% -15% + 19% + 29% + 10%) / 5 = 12.0%

Real Return = Nominal Return - Inflation = 12% - 2.6% = 9.4%

Risk Premium = Nominal Return - T-bill Return = 12% - 4.3% = 7.7%

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