Question

Consider the following information on large-company stocks for a period of years. Series Arithmetic Mean Large-company stocks 12.1 % Inflation 3.4A. What was the arithmetic average annual return on large-company stocks in nominal terms?
B. What was the arithmetic average annual return on large-company stocks in real terms?

Answer 1

Answer:

a. 12.1 %

b. 8.41%

Explanation:

a. The arithmetic average annual return on large-company stocks in nominal terms is already stated in the table as 12.1%.

This is because it was not yet adjusted for inflation making it nominal.

b. The arithmetic average annual return on large-company stocks in real terms can be expressed by;

Real Return = [(1 + Nominal rate) / (1 + Inflation rate)] - 1

= (( 1 + 12.1%) / ( 1 + 3.4%)) - 1

= (1.121/1.034) - 1

= 1.0841 - 1

= 8.41%