Question

You’ve observed the following returns on Yamauchi Corporation’s stock over the past five years: –28.2 percent, 15.8 percent, 34.6 percent, 3.4 percent, and 22.4 percent. The average inflation rate over this period was 3.34 percent and the average T-bill rate over the period was 4.3 percent. a. What was the average real return on the stock?

Answer 1

Answer: 0.93%

Explanation:

The average real risk free rate is given as:

(1 + R) = (1 + r)(1 +h)

where r= average t-bill rate

where h = average inflation rate

(1 + R) = (1 + r)/(1 +h)

(1 + R) = (1 + 4.3%)/(1 + 3.34%)

(1 + R) = (1 + 0.043)/(1 + 0.0334)

(1 + R) = (1.043)/(1.0334)

(1 + R) = 1.0092897

R = 1.0092897 - 1

R = 0.0092897

R = 0.93%

The average real return on the stock is 0.93%.