You\'ve observed the following returns on Crash-n-Burn Computer\'s stock over th

Question

You've observed the following returns on Crash-n-Burn Computer's stock over the past five years: 17 percent, -4 percent, 20 percent, 12 percent, and 10 percent. Suppose the average inflation rate over this period was 2.7 percent and the average T-bill rate over the period was 5.4 percenft 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 0

Explanation / Answer

Real Rate of Return = [(1+ Nominal Rate)/ (1+ Inflation Rate)] - 1

Real Rate of Return for year 1 = [(1+ Nominal Rate for year 1)/ (1+ Inflation Rate)] - 1

= [(1+17%)/(1+2.7%)] - 1 = 13.924%

Real Rate of Return for year 2 = [(1+ Nominal Rate for year 2)/ (1+ Inflation Rate)] - 1

= [(1-4%)/(1+2.7%)] - 1 = - 6.524%

Real Rate of Return for year 3 = [(1+ Nominal Rate for year 3)/ (1+ Inflation Rate)] - 1

= [(1+20%)/(1+2.7%)] - 1 = 16.845%

Real Rate of Return for year 4 = [(1+ Nominal Rate for year 4)/ (1+ Inflation Rate)] - 1

= [(1+12%)/(1+2.7%)] - 1 = 9.055%

Real Rate of Return for year 5 = [(1+ Nominal Rate for year 5)/ (1+ Inflation Rate)] - 1

= [(1+10%)/(1+2.7%)] - 1 = 7.108%

Average of all real returns over 5 years = Sum of returns of all 5 years/ 5

= (13.924% - 6.524% + 16.845% + 9.055% + 7.108%)/5 = 8.08%

-------------------------------------------------------------

Average nominal rate = Sum of all nominal rates over 5 years / 5

= (17% - 4% + 20% + 12% + 10%)/5 = 11%

Riskfree rate = 5.4%

Average nominal risk premium = Average nominal rate - Riskfree rate  = 11% - 5.4% = 5.6%

  

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.