Youve observed the following returns on Barnett Corporations

You’ve observed the following returns on Barnett Corporation’s stock over the past five years: –27.9 percent, 15.6 percent, 34.2 percent, 3.3 percent, and 22.3 percent. The average inflation rate over this period was 3.33 percent and the average T-bill rate over the period was 4.3 percent.

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

Average nominal risk premium: %

Solution

Average return = (-27.9%+15.6%+34.2%+3.3%+22.3%)/5

Average return = 9.50%

.

a.

Average real rate of return as per fisher equation:

Average real return = (1+Average return)/(1+Inflation rate)-1

Average real return = (1+9.50%)/(1+3.33%)-1

Average real return = 5.97%

.

b.

Average nominal risk premium = Average return - Risk free rate

Average nominal risk premium = 9.50%-4.30%

Average nominal risk premium = 5.20%