Question

We know that during the last 10 years, the average historical return on a market index is 12%. We also know that the average inflation rate and average risk-free rate over the last 10 years are 2% and 5%, respectively. What is the real risk premium using the exact Fisher equation?

Select one:

a. 2.94%

b. 6.86%

c. 7.00%

d. 9.80%

e. 10.00%

Given the following share price history, calculate the standard deviation of the returns on this stock.

Year	Share price
1	$35
2	$30
3	$39
4	$42
5	$45

Select one:

a. 0.18%

b. 5.89%

c. 18.08%

d. 3.27%

e. 1.81%

What is the geometric average return of a stock with the following share price history?

Year	Share price
1	$35
2	$30
3	$39
4	$42
5	$45

Select one:

a. 7.95%

b. 7.64%

c. 7.14%

d. 6.84%

e. 6.48%

Answer 1

(1) Average Market Index Return = 12 % (Nominal or non inflation adjusted value)

Average Inflation = 2 %

Real Market Index Return = RMIR = [1.12 / 1.02] - 1 = 0.09804 or 9.804%

Average Risk Free Rate = 5 % (Nominal or non inflation adjusted value)

Real Risk Free Rate = RRFR = [1.05/1.02] -1 = 0.02941 or 2.941 %

Therefore, Real Risk Premium = RMIR - RRFR = 9.804 - 2.941 = 6.863 %

Hence, the correct option is (b).

NOTE: Please raise separate queries for solutions to the remaining unrelated questions.