a. | |||||
Calculation of average nominal return on Crash-n-Burn's stock | |||||
Average nominal return | (12%-12%+19%+24%+10%)/5 | ||||
Average nominal return | 53%/5 | ||||
Average nominal return | 10.60% | ||||
Using the fisher equation we can calculate the average real return on stock | |||||
(1+rn) | (1+ri)*(1+i) | ||||
rn represents nominal return | |||||
ri represents real return | |||||
I represents inflation rate | |||||
(1+ri) | ((1+rn)/(1+i)) | ||||
(1+ri) | (1.1060/1.025) | ||||
(1+ri) | 1.079024 | ||||
ri | 1.079024-1 | ||||
ri | 7.90% | ||||
Thus, average return return is 7.90%. | |||||
b. | |||||
Average nominal risk premium | Average nominal return - Risk free rate | ||||
Average nominal risk premium | 10.60%-3.2% | ||||
Average nominal risk premium | 7.40% | ||||
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