Problem 12-11 Calculating Real Rates [LO1] You’ve observed the following returns
ID: 2788865 • Letter: P
Question
Problem 12-11 Calculating Real Rates [LO1]
You’ve observed the following returns on Crash-n-Burn Computer’s stock over the past five years: 10 percent, –11 percent, 18 percent, 19 percent, and 10 percent. Suppose the average inflation rate over this period was 2.2 percent and the average T-bill rate over the period was 4.7 percent.
What was the average real risk-free rate over this time period? (Do not round intermediate calculations. 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. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
You’ve observed the following returns on Crash-n-Burn Computer’s stock over the past five years: 10 percent, –11 percent, 18 percent, 19 percent, and 10 percent. Suppose the average inflation rate over this period was 2.2 percent and the average T-bill rate over the period was 4.7 percent.
Explanation / Answer
Average real risk free rate = 4.7 - 2.2 = 2.50%
average real risk premium = 10-11+18+19+10/5 - 2.50% = 6.90%