Consider the following information on large-company stocks for a period of years

Question

Consider the following information on large-company stocks for a period of years. Series Arithmetic Mean Large-company stocks 12.9 % Inflation 3.4    a. What was the arithmetic average annual return on large-company stocks in nominal terms? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)    Nominal return             % b. What was the arithmetic average annual return on large-company stocks in real terms? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)    Real return             %

Explanation / Answer

Solution:

a. The nominal return is the stated return which is 12.9%

b. Using the fisher equation, the real return was

(1 + R) = (1 + r) (1 + h)

r = 1.129/1.034 - 1

r = 0.0919 or 9.19%

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