Question

You�ve observed the following returns on crash-n-burn computer�s stock over the past five years: 17 percent, �4 percent, 20 percent, 12 percent, and 10 percent. suppose the average inflation rate over this period was 2.7 percent and the average t-bill rate over the period was 5.4 percent. what was the average real risk-free rate over this time period?

Answer 1

Given:
average inflation rate: 2.7%
average t-bill rate: 5.4%
returns
17%
- 4%
20%
12%
10%

Average returns = (17% - 4% + 20% + 12% + 10%) / 5 = 11%

Average real risk-free rate using the Fisher equation.

The average real risk-free rate was: (1 +R) = (1 +r)(1 +h)
f = (1.054/1.027) – 1
f = 1.0263 - 1
f = 0.0263 or 2.63%

The average real risk-free rate over this time period is 2.63%