Question

You've observed the following returns on Crash-n-Burn Computer's stock over the past five years: 8 percent, -15 percent, 19 percent, 31 percent, and 21 percent. Suppose the average inflation rate over this period was 3.1 percent and the average T-bill rate over the period was 3.9 percent. a. What was the average real return over this time period? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What was the average nominal risk premium over this time period? (Do not round intermediate calculations and enter your answer as a percent rounded to 1 decimal place, e.g., 32.1.) Answer is complete but not entirely correct. a. b. Average real risk-free rate Average real risk premium 9.40 7.10% % %

Answer 1

Average real risk free rate= (1 +R) = (1 +1)(1 +h) R = 0.78% (1+3.9%)/(1.031)-1 Average real risk free rate = 0.78% Average return = 12.80% (0.12-0.12+0.19+0.24+0.1)/5 Average real return = 9.41% (1+0.128)/(1.031)-1 Average real risk premium = 8.63% [9.41% - 0.78%)