Question

You’ve observed the following returns on Yasmin Corporation’s stock over the past five years: 18 percent, –3 percent, 16 percent, 11 percent, and 10 percent. Suppose the average inflation rate over this period was 3.2 percent and the average T-bill rate over the period was 5.5 percent.

a. What was the average real return on the company's stock? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Average real return             %

b. What was the average nominal risk premium on the company's stock? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place, e.g., 32.1.)

Average nominal risk premium             %

Answer 1

Answer:
Average Nominal Return = [0.18 + (-0.03) + 0.16 + 0.11 + 0.10] / 5
Average Nominal Return = 0.52 / 5
Average Nominal Return = 0.1040 or 10.40%

Answer a.
Average Real Return = [Average Nominal Return - Average Inflation Rate] / [1 + Average Inflation Rate]
Average Real Return = [0.1040 - 0.0320] / [1 + 0.0320]
Average Real Return = 0.0720 / 1.0320
Average Real Return = 0.0698 or 6.98%

Answer b.
Average Nominal Risk Premium = Average Nominal Return - Average Risk-free Rate
Average Nominal Risk Premium = 10.40% - 5.50%
Average Nominal Risk Premium = 4.90%