You’ve observed the following returns on Yasmin Corporation’s stock over the pas

Question

You’ve observed the following returns on Yasmin Corporation’s stock over the past five years: 14 percent, –14 percent, 16 percent, 26 percent, and 10 percent. Suppose the average inflation rate over this period was 3.5 percent and the average T-bill rate over the period was 4 percent. What was the average real risk-free rate over this time period? (Do not round intermediate calculations. 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. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Average real risk premium %

Explanation / Answer

Answer a.

Average Risk-free Rate = 4%
Inflation Rate = 3.5%

Real Risk-free Rate = (Average Risk-free Rate - Inflation Rate) / (1 + Inflation Rate)
Real Risk-free Rate = (0.04 - 0.035) / 1.035
Real Risk-free Rate = 0.0048
Real Risk-free Rate = 0.48%

Answer b.

Average Rate of Return = (0.14 + (-0.14) + 0.16 + 0.26 + 0.10) / 5
Average Rate of Return = 0.104
Average Rate of Return = 10.40%

Real Rate of Return = (Average Rate of Return - Inflation Rate) / (1 + Inflation Rate)
Real Rate of Return = (0.1040 - 0.035) / 1.035
Real Rate of Return = 0.0667
Real Rate of Return = 6.67%

Average Real Risk Premium = Real Rate of Return - Real Risk-free Rate
Average Real Risk Premium = 6.67% - 0.48%
Average Real Risk Premium = 6.19%

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