Question

Consider the following information on large-company stocks for a period of years. Series Arithmetic Mean Large-company stocks 15.5 % Inflation 3.6 a. What was the arithmetic average annual return on large-company stocks in nominal terms? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Nominal return 11.49 % b. What was the arithmetic average annual return on large-company stocks in real terms?

Answer 1

(a)-The arithmetic average annual return on large-company stocks in nominal terms

The arithmetic average annual return on large-company stocks in nominal terms is 15.50% (The rate given in the question)

“Nominal Return = 15.50%”

(b)-The arithmetic average annual return on large-company stocks in real terms

The Real Rate of Return is calculated by using the following formula

Real Rate of Return = [(1 + Nominal Rate) / (1 + Inflation Rate)] – 1

Nominal Rate = 15.50%

Inflation Rate = 3.60%

Therefore, Real Rate of Return = [(1 + Nominal Rate) / (1 + Inflation Rate)] – 1

= [(1 + 0.1550) / (1 + 0.0360)] – 1

= 1.114865 – 1

= 0.114865 or

= 11.49% (Rounded to 2 decimal place)

“Real Return = 11.49%”