Question

9. You’ve observed the following returns on SkyNet Data Corporation’s stock over the past five years: 10 percent, –10 percent, 17 percent, 22 percent, and 10 percent. Suppose the average inflation rate over this period was 1.5 percent and the average T-bill rate over the period was 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.)

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.)

Answer 1

1

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

=((1+0.03)/(1+0.015)-1)*100

= 1.48

Year	Stock
1	10.00%
2	-10.00%
3	17.00%
4	22.00%
5	10.00%
Average=	9.80%

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+0.098)/(1+0.015)-1)*100

Real return = 8.18

Real risk premium = real return-real risk free = 8.18-1.48 = 6.7%