Question

You’ve observed the following returns on Barnett Corporation’s stock over the past five years: –29.1 percent, 16.4 percent, 35.8 percent, 3.7 percent, and 22.7 percent. The average inflation rate over this period was 3.37 percent and the average T-bill rate over the period was 4.3 percent. What was the average real risk-free rate 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.) Average real risk-free rate % What was the average real risk premium? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Average real risk premium %

Answer 1

a)	Average return of the Barnett stock =                                       (-29.1+16.40+35.80+3.70+22.70)/5 =	9.90%
	The average real return can be obtained by using the
	Fisher equation of
	(1+R) = (1+r)*(1+h) =
	where r is the average real return, R = the nominal return and h = the inflation rate.
	Substituting values, we have
	1+0.099 = (1+r)*(1+0.0337)
	r or the real average return = 1.099/1.0337-1 =	6.32%
b)	Average real risk free rate, using the fisher equation = 1.043/1.0337-1 =	0.90%
c)	Average real risk premium = 6.32-0.90 =	5.42%