Question

TABLE 12.2Average Annual Returns: 1926-2016 Investment Average Return Large-company stocks 12.0% Small-company stocks 16.6 Long-term corporate bonds 6.3 Long-term government bonds 6.0 U.S. Treasury bills 3.4 Inflation 3.0 Source: Morningstar, 2017, author calculations a. What was the average annual return on large-company stock from 1926 through 2016 in nominal terms? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What was the average annual return on large-company stock from 1926 through 2016 in real terms? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

a. 12%

b. 8.74%

Explanation:

The computations are shown below:

a. The average annual return on large company stock from 1926 through 2016 is 12% which is already mentioned in the question

b. Real rate of return = {( 1 + nominal rate of return) ÷ ( 1+ inflation rate)} - 1

= {( 1 + 0.12) ÷ ( 1 + 0.03)} - 1

= (1.12 ÷ 1.03) - 1

= 1.08737 -1

= 0.08737

= 8.74%