Question

You've observed the following returns on Crash-n-Burn Computer's stock over the past five years: 6 percent, -14 percent, 12percent, 9 percent, and 11 percent. Suppose the average inflation rate over this time period was 2.8 percent and the average T-bill rate was 3.2 percent. Based on this information, what was the average nominal risk premium?

Answer 1

Answer:

1.6%

Explanation:

For computing the average nominal risk premium, first we have to determine the average nominal return which is shown below:

= (Stock over past five years) ÷ (number of years)

= (6% - 14% + 12% + 9% + 11%) ÷ (5 years)

= 4.8%

Now the average nominal risk premium would be

= Average nominal return - average T-bill rate

= 4.8% - 3.2%

= 1.6%