Question

Using the following returns, calculate the standard deviation of returns for Spotify:

Year	Return
1	14%
2	20%
3	-9%
4	3%
5	17%

According to the Fisher effect, what is the relationship between real and nominal returns when inflation is greater than zero?

Real returns < Nominal returns

Real returns > Nominal returns

Real returns = Nominal returns

Answer 1

1) The mean return = (14 + 20 - 9 + 3 +17) / 5 = 9%

Years	Return	mean return	Return - mean return	(Return - mean return)^2
1	14	9	5	25
2	20	9	11	121
3	-9	9	-18	324
4	3	9	-6	36
5	17	9	8	64
Total	570

Sample variance =[ Sum of (Return - mean return)^2 ] /( n-1) , where n is the number of observations

= 570 / (5-1)

= 570/4 = 142.5

Standard deviation = sqrt(variance) = sqrt(142.5) = 11.94%

2) According to the Fisher effect= Nominal interest rate = real interest rate + expected inflation

When inflation is greater than zero , the nominal rate will be higher than the real rate

So the correct optiion is Real returns < Nominal returns