Question

Assume that large-company stocks had an average rate of return of 18. 5 percent over the past 55 years while T-bills returned an average of 2. 4 percent and inflation averaged 1. 8 percent. Given this, the real return on large-company stocks was:

A. 13. 56 percent

B. 12. 49 percent

C. 16. 40 percent

Answer 1

According to the given information, the real return on large company stocks was 16.40 percent.

The Fisher equation, which shows the exact relationship between normal interest rates , real interest rates, and inflation, is:

( 1+ R ) = ( 1+r )( 1+h)

( 1+ 0.185) = ( 1+r)( 1+ 0.018)

r = [ ( 1+0.185)/ ( 1+ 0.018)] - 1

r = 0.1640 or 16.40%

Hence, the real return on large company stocks was 16.40%.

What do you mean by Fisher equation?

The Fisher equation is a concept in economics that describes the relationship between nominal and real interest rates under the effect of inflation. The equation states that the nominal interest rate is equal to the sum of the real interest rate plus inflation.

The Fisher equation is often used in situations where investors or lenders ask for an additional reward to compensate for losses in purchasing power due to high inflation.

Inflation + Real Interest Rate = Nominal Interest Rate

To know more about Fisher equation from the given link:

https://brainly.com/question/21323568

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