Question

Question 28

Over the past 4 years, large-company stocks and U.S. Treasury bills have produced the returns stated below. During this period, inflation averaged 1.5 percent. Given this information, the average real rate of return on large-company stocks was ___ percent as compared to _____ percent for Treasury bills.
  

	Year 1	Year 2	Year 3	Year 4
Return (Large Cap Stocks)	12%	9%	6%	3%
Return (U.S. Tsy-bills)	4%	2%	1%	1%

Group of answer choices

5.9; -0.5

6.5; -0.5

5.9; 0.5  

6.5; 0.5

6.5; 0.0

Answer 1

Year	Large cap	T bills
1	12.00%	4.00%
2	9.00%	2.00%
3	6.00%	1.00%
4	3.00%	1.00%
Average=	7.50%	2.00%

Where

Average or Mean = Sum of all observations/Count of all observations

Real return = ((1+nominal return)/(1+inflation rate)-1)*100

Real return=((1+0.075)/(1+0.015)-1)*100

Real return = 5.91

Real return = ((1+nominal return)/(1+inflation rate)-1)*100

Real return=((1+0.02)/(1+0.015)-1)*100

Real return = 0.49

5.9; 0.5