Question

Look at Table 6.1. Compare the best and worst years for T-bills in terms of their nominal returns, and then compare the best and worst years in terms of real returns. Comment on what you find.

Table 6.1-Percentage Returns on Bi Bonds, and Stock 1900-2006 Stocks earn the highet average returns, but they Actuate over a wide trge beau, ta bonds falbetwien seocks and tills along both dimerio Real Asset Class Arage Beist Year orutaAvrage Bet Year Wonst Yer Sonds Snocks 116 $2 -419

Answer 1

Real return = Nominal return - Inflation rate

So,

Inflation rate = Nominal return - Real return

(i) For T-Bills, nominal return in Best year is 14.7% and nominal return in Worst year is 0%. Therefore in Best year, nominal return was higher by a 14.7% differential.

(ii) For T-Bills, real return in Best year is 19.7% and real return in Worst year is -15.1%. Therefore in Best year, real return was higher by a 34.8% [= 19.7% - (-15.1%)] differential.

(iii) Since differential of nominal return is less than differential of real return (14.7% < 34.8%), it signifies a decrease in inflation rate between Best year and Worst year.