HW ch 10 and 12

# To find the average return we sum all the returns and

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To find the average return, we sum all the returns and divide by the number of returns, so: Average return = (.15 – .06 + .18 + .14 + .10) / 5 Average return = .102, or 10.2% To calculate the average real return, we can use the average return of the asset, and the average inflation in the Fisher equation. Doing so, we find: (1 + R ) = (1 + r )(1 + h ) = (1.102 / 1.017) – 1 = .0836, or 8.36% b. The average risk premium is simply the average return of the asset, minus the average risk-free rate, so, the average risk premium for this asset would be: Average risk premium = Average return − Average risk-free rate Average risk premium = .102 − .052 8.36 ± 1% 5.0 ± 1%

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Average risk premium = .050, or 5.0%

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