You’ve observed the following returns on Barnett Corporation’s stock over the pa

Question

You’ve observed the following returns on Barnett Corporation’s stock over the past five years: –28.8 percent, 16.2 percent, 35.4 percent, 3.6 percent, and 22.6 percent. The average inflation rate over this period was 3.36 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 and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Average real risk-free rate             %

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

Average real risk premium

Explanation / Answer

Answer)

Average real risk free rate =[ (1+ Average risk free rate) / (1+ Average Inflation rate) ] - 1

=[ (1+0.043) / (1+0.0336) ] - 1

= 0.676%

Average real risk premium = Average real return of Barnett Corporation - Average real risk free rate

Average return of Barnett Corporation = (28.8+16.2+35.4+3.6+22.6)/5 = 21.32%

Average real return of Barnett Corporation = [ (1+ Average return Barnett Corp.) / (1+ Average Inflation rate) ] - 1

Average real return of Barnett Corporation = 17.376%

Average real risk premium = 17.376%-0.676% = 16.7%

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