Question

You’ve observed the following returns on Barnett Corporation’s stock over the past five years: –26.4 percent, 14.6 percent, 32.2 percent, 2.8 percent, and 21.8 percent. The average inflation rate over this period was 3.28 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?

Answer 1

T bill rate over the period = 4.3%

T bill means Government Treasury bills. We can consider the T bill rate is Risk free rate.

Then Risk Free Rate (Rf) = 4.3%

The average inflation rate over the period = 3.28%

The real risk-free rate of return (R_f) is the minimum return an investor requires. This rate does not take into account expected inflation and the capital market environment.

Assume that given Risk free return is Nominal risk free return.

Nominal Risk Free Rate (Rf) = 4.3%

Real risk free rate (R_f) = (1 + nominal risk-free rate)  - 1
(1 + inflation rate)

Assume that given Risk free return is Nominal Risk free return.

Nominal Risk Free Rate (Rf) = 4.3%

Real risk free rate (R_f) = 1+0.043 -1 = 4.16%
1+0.0328