Question

The year-end price and dividend information on a stock is given in the following table. Year Price 24.10 20.40 21.50 Dividend NA 0.11 0.19 2 3 Note: NA denotes not applicable. a. What is the nominal return of the stock in years 2 and 3? (Negative values should be indicated by a minus sign. Round your answers to 2 decimal places.) Year Nominal Return 2 % 3 % b. What is the corresponding real return if the inflation rates for years 2 and 3 were 2.6% and 1.8%, respectively? (Negative values should be indicated by a minus sign. Round your answers to 2 decimal places.) Year Real Return 2 % 3 %

Answer 1

a)

1) The nominal return of the stock in year 2:

Given :

P_t = 20.40 , P_t-1 = 24.10 , I_t = 0.11

Solution :

$R = \frac{P_t + I_t - P_{t-1}}{P_{t-1}}$

$R = \frac{20.40 + 0.11 - 24.10}{24.10}$

R= -0.1489 -0.15

1) The nominal return of the stock in year 3:

Given :

P_t =21.50 , P_t-1 = 20.40 , I_t = 0.19

Solution :

$R = \frac{P_t + I_t - P_{t-1}}{P_{t-1}}$

$R = \frac{21.50 + 0.19 - 20.40}{20.40}$

Year	Nominal Return
2	-15 %
3	6.3%

b)

1) The real return if the inflation rate for year 2 was 2.6%

Given :

R = -0.15 , i = 2.6% = 0.026

Solution :

$r = \frac{1 + R}{1+i} - 1$

$r = \frac{1 - 0.15}{1+0.026} - 1$

2)

The real return if the inflation rate for year 3 was %

Given :

R = 0.063 , i = 1.8% = 0.018

Solution :

$r = \frac{1 + R}{1+i} - 1$

$r = \frac{1 + 0.063}{1+0.018} - 1$

Year	Real Return
2	-17.15%
3	4.42%

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