Question

You’ve observed the following returns on Yamauchi Corporation’s stock over the past five years: −10 percent, 24 percent, 21 percent, 11 percent, and 8 percent. The average inflation rate over this period was 3.1 percent and the average T-bill rate over the period was 4.1 percent. a. What was the average real return on the stock? (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 on the stock? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

Year   Return

1           -0.10

2           0.24

3           0.21

4           0.11

5           0.06

            0.540

Average return = 0.540 / 5

Average return =0.108

Average return = 10.80%

a. Average Real Return = [( 1 + Average return) / (1+ inflation rate)] - 1

Average Real Return = [(1+0.1080)/(1+0.081)] - 1

Average Real Return = 0.0747

Average Real Return = 7.47%

b. Average Nominal Risk Premium = Average Return - Risk free rate

Average Nominal Risk Premium = 0.1080 - 0.041

Average Nominal Risk Premium = 0.067

Average Nominal Risk Premium = 6.70%