What is the avg. annual return on large company stock from 1926 to 2013 in nomin

Question

What is the avg. annual return on large company stock from 1926 to 2013 in nominal terms?

Then same thing in real terms?

FIGURE 12.10 Historical Returns, Standard Deviations, and Frequency Distributions: 1926-2013 Average Return Standard Frequency Distribution Series Large-company stocks 12.1% 20.2% al Small-company stocks 16.9 32.3 Long-term corporate bonds 6.3 8.4 Long-term government 5.9 9.8 bonds Intermediate-term 5.4 5.7 government bonds U.S. Treasury bills 3.5 3.1 Inflation 3.0 The 1933 small-company stocks total return was 142.9 percent. SOURCE: Modified from Stocks. Bonds, Bills, and inflation: 2014 Yearbook™ annually updates work by Roger G. Ibbotson and Rex A. Sinquefield (Chicago: Morningstar). All rights reserved.

Explanation / Answer

Large company stocks

average returns

12.10%

Nominal return

12.10%

(inflation is not considered for nominal returns, it is the annualized percentage rate which is equal t o the periodic interest rate x no. of periods per annum)

Real interest rate is the inflation adjusted rate used to identify investment potential.

1+Real interest rate = (1+nominal rate)/(1+inflation)

inflation

3%

1+r=(1+0.121)/(1+0.03)

calculate r:

1+r= 1.121/1.03

1+r=1.0874

r=0.874

Real Rate Of Return

8.74%

Large company stocks

average returns

12.10%

Nominal return

12.10%

(inflation is not considered for nominal returns, it is the annualized percentage rate which is equal t o the periodic interest rate x no. of periods per annum)

Real interest rate is the inflation adjusted rate used to identify investment potential.

1+Real interest rate = (1+nominal rate)/(1+inflation)

inflation

3%

1+r=(1+0.121)/(1+0.03)

calculate r:

1+r= 1.121/1.03

1+r=1.0874

r=0.874

Real Rate Of Return

8.74%

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