You’ve observed the following returns on Yasmin Corporation’s
stock over the past five years: 20 percent, –12 percent, 17
percent, 20 percent, and 10 percent. Suppose the average inflation
rate over this period was 1.7 percent and the average T-bill rate
over the period was 4.6 percent.
a. What was the average real return on the
company's stock? (Do not round intermediate calculations.
Enter your answer as a percent rounded to 2 decimal places, e.g.,
32.16.)
Average real return ______ %
b. What was the average nominal risk premium on
the company's stock? (Do not round intermediate
calculations. Enter your answer as a percent rounded
to 1 decimal place, e.g., 32.1.)
Average nominal risk premium _______ %
a
Average return = (.20-.12+.17+.20+.10) / 5=11.00%
To calculate the average real return, we can use the average return of the asset, and the average inflation in the Fisher equation.
(1 + R) = (1 + r)(1 + h)
= (1+11%)/(1+1.7%) - 1
Average real return=9.14%
b
Average risk premium = Average return − Average risk-free rate
= .110 − .046=.0640
Average risk premium=6.40%
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