Business Finance Answers_Part_59

Business Finance Answers_Part_59 - CHAPTER 12 B-233 22. To...

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CHAPTER 12 B-233 22. To find the real return we need to use the Fisher equation. Re-writing the Fisher equation to solve for the real return, we get: r = [(1 + R)/(1 + h)] – 1 So, the real return each year was: Year T-bill return Inflation Real return 1973 0.0729 0.0871 –0.0131 1974 0.0799 0.1234 –0.0387 1975 0.0587 0.0694 –0.0100 1976 0.0507 0.0486 0.0020 1977 0.0545 0.0670 –0.0117 1978 0.0764 0.0902 –0.0127 1979 0.1056 0.1329 –0.0241 1980 0.1210 0.1252 –0.0037 0.6197 0.7438 –0.1120 a. The average return for T-bills over this period was: Average return = 0.619 / 8 Average return = .0775 or 7.75% And the average inflation rate was: Average inflation = 0.7438 / 8 Average inflation = .0930 or 9.30% b. Using the equation for variance, we find the variance for T-bills over this period was: Variance = 1/7[(.0729 – .0775) 2 + (.0799 – .0775) 2 + (.0587 – .0775) 2 + (.0507 – .0775) 2 + (.0545 – .0775) 2 + (.0764 – .0775) 2 + (.1056 – .0775) 2 + (.1210 .0775) 2 ] Variance = 0.000616 And the standard deviation for T-bills was: Standard deviation = (0.000616) 1/2 Standard deviation = 0.0248 or 2.48% The variance of inflation over this period was: Variance = 1/7[(.0871 – .0930) 2 + (.1234 – .0930) 2 + (.0694 – .0930) 2 + (.0486 – .0930) 2 + (.0670 – .0930) 2 + (.0902 – .0930) 2 + (.1329 – .0930) 2 + (.1252 .0930) 2 ] Variance = 0.000971 And the standard deviation of inflation was: Standard deviation = (0.000971) 1/2 Standard deviation = 0.0312 or 3.12%
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B-234 SOLUTIONS c . The average observed real return over this period was:
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Business Finance Answers_Part_59 - CHAPTER 12 B-233 22. To...

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