Standard deviation of returns The following table shows the nominal returns on the U.S. stocks and the rate of inflation.
- a. What was the standard deviation of the nominal market returns?
- b. Calculate the arithmatic average real return.
a.
To compute: The standard deviation of nominal market return.
Explanation of Solution
The formula to calculate average nominal return is as follows:
The computation of average nominal return is as follows:
Hence, the average nominal return is 16.02%.
The formula to calculate variance is as follows:
The calculation of variance is as follows:
Hence, the variance is .010595
The formula to calculate standard deviation is as follows:
The Computation of standard deviation is as follows:
Hence, the standard deviation of nominal market return is 10.29%%.
b.
To compute: The arithmetic average real return.
Explanation of Solution
The formula to calculate average real return is as follows:
The computation of average real return is as follows:
Hence, the average real return is .1412, or 14.12%.
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Chapter 7 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
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