Nominal versus Real Returns

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Assignment 5 Text edition 7: Chapter 12 – Questions and Problems – 5, 7, 8, 9, 12, 13. 5. Nominal versus Real Returns: a. In nominal terms? b. In real terms? The nominal return is 10.23% from the table. To find the real return, we use the fisher equation (1 + R) = (1 + r) (1 + h) (1 + 0.1023) = (1 + r) (1 + 0.0406) 1.1023 = (1 + r) (1.0406) 1 + r = 1.0593 r = 1.0593 – 1 r = 0.0593 or 5.93% 7. Calculating Returns and Variability: Returns Year X Y 1 6% 18% 2 24 39 3 13 -6 4 -14 -20 5 15 47 Return X Arithmetic average returns, R = [R1 +R2 + R3 + R4 + R5]/N = [0.06 + 0.24 + 0.13 – 0.14 + 0.15]/5 = 0.44/5 = 0.088 or 8.80% Variance = 1/ (N – 1) [(R1 – R) 2 + (R2 – R) 2 + (R3 – R) 2 + (R4 – R) 2+ (R5 – R) 2] = 1/ (5 – 1) [(0.06 – 0.088)2 + (0.24 – 0.088)2 + (0.13 – 0.088)2 + (-0.14 – 0.088)2+ (0.15 – 0.088)2] = ¼ [0.08148] = 0.02037 Standard deviation = vVariance = v0.02037 = 0.1427 or 14.27% Return Y Arithmetic average returns, R = [R1 +R2 + R3 + R4 + R5]/N = [0.18 + 0.39 + (-0.06) + (-0.20) + 0.47]/5 = 0.78/5 = 0.1560 or 15.60% Variance = 1/ (N – 1) [(R1 – R) 2 + (R2 – R) 2 + (R3 – R) 2 + (R4 – R) 2+ (R5 – R) 2] = 1/ (5 – 1) [(0.18 – 0.156)2 + (0.39 – 0.156)2 + (-0.06 – 0.156)2 + (-0.20 – 0.156)2+ (0.47 – 0.156)2] = ¼ [0.32732] = 0.08183 Standard deviation = vVariance = v0.08183 = 0.2861 or 28.61% 8. Risk Premiums: a. Calculate the…