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Nominal versus Real Returns

1. Nominal versus Real Returns: What is the average annual return on Canadian stock from 1957 through 2008:

1. In nominal terms?

1. In real terms?

1. Calculating Returns and Variability: Using the following returns, calculate the arithmetic average returns, the variances and the standard deviations for X and Y.

Returns

Year                            X                                  Y

1                                  6%                              18%

2                                  24                                39

3                                  13                                -6

4                                  -14                              -20

5                                  15                                47

1. Risk Premiums: Refer to the table attached and look at the period from 1970-1975.

1. Calculate the arithmetic average returns for large-company stocks and T-Bills over this period.

1. Calculate the standard deviation of the returns for large-company stocks and T-Bills over this period.

1. Calculate the observed risk premium in each year for the large-company stocks versus T-Bills. What was the average risk premium over this period? What was the standard deviation of the risk premium over this period?

1. Is it possible for the risk premium to be negative before an investment is undertaken? Can the risk premium be negative after the fact?

1. Calculating Returns and Variability: You’ve observed the following returns on Crash-n-Burn Computer’s stock over the past 5 years: 2 percent, -8 percent, 24percent, 19 percent and 12 percent.

1. What was the arithmetic average return on Crash-n-Burn’s stock over this 5-year period?

deviation?

1. Effects of Inflation: Look at table 12.1 (same table from Q8) and the attached figure (12.4), When were T-bill rates at their highest over the period of 1957 through 2008? Why do you think they were so high during this period? What relationship underlies your answer?

1. Calculating Investment Returns: You bought one of Great White Shark Repellant Co’s 7 percent coupon bonds one year ago for \$920. These bonds make annual payments and mature in six years from now. Suppose you decide to sell your bonds today, when the required return on bonds is 8 percent. If the inflation rate was 4.2 percent over the past year, what was your total real return on investment?

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