(a)-The average real return on the company’s stock
Average Rate of Return = Sum of Returns / Number of years
= [-28.80% + 16.20% + 35.40% + 3.60% + 22.60%] / 5 Years
= 49.00% / 5 Years
= 9.80%
Average real rate of return = [(1 + Real Rate of Return) / (1 + Inflation Rate)] – 1
Real Rate of Return = 9.80%
Inflation Rate = 3.36%
Therefore, The Average nominal risk premium = [(1 + Real Rate of Return) / (1 + Inflation Rate)] – 1
= [(1 + 0.0980) / (1 + 0.0336)] – 1
= [1.0980 / 1.0336] – 1
= 1.062306502 – 1
= 0.062306502 or
= 6.23%
“Hence, the average real return on the company’s stock will be 6.23%”
(b)-Average nominal risk premium on the company’s stock
Average Nominal Risk Premium = Average Return − Average Risk-free rate
= 9.80% - 4.30%
= 5.50%
“Hence, the average nominal risk premium on the company’s stock will be 5.50%”
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