PRINCIPLES OF CORPORATE FINANCE
13th Edition
ISBN: 9781264052059
Author: BREALEY
Publisher: MCG
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Textbook Question
Chapter 7, Problem 2PS
Real versus nominal returns The Costaguana stock market provided a
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The Costaguana stock market provided a rate of return of 93%. The inflation rate in Costaguana during the year was 80%. In Ruritania
the stock market return was 13%, but the inflation rate was only 4%.
a. Calculate the real rate of return for Costaguana stock market?
Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.
b. Calculate the real rate of return for Ruritania stock market?
Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.
c. Which country's stock market provided the higher real rate of return?
a. Real rate of return for Costaguana stock market
b. Real rate of return for Ruritania stock market
c. Higher real rate of return
%
%
The following table shows the nominal returns on Brazilian stocks and the rate of inflation.
Year
Nominal Return (%)
2015
2016
0.2
-13.0
2017
-11.0
2018
-42.1
2019
2020
66.9
27.6
Inflation (%)
6.5
6.6
7.1
11.4
7.0
3.6
a. What was the standard deviation of the market returns?
Note: Use decimals, not percents, in your calculations. Do not round intermediate calculations. Enter your answer as a
percent rounded to 2 decimal places.
b. Calculate the average real return.
Note: A negative answer should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer as
a percent rounded to 2 decimal places.
a. Standard deviation
b. Average real return
%
%
The Narnian stock market had a rate of return of 45% last year, but the inflation rate was 30%. What was the real rate of return to Narnian investors?
Chapter 7 Solutions
PRINCIPLES OF CORPORATE FINANCE
Ch. 7 - Rate of return The level of the Syldavia market...Ch. 7 - Real versus nominal returns The Costaguana stock...Ch. 7 - Arithmetic average and compound returns Integrated...Ch. 7 - Risk premiums Here are inflation rates and U.S....Ch. 7 - Risk Premium Suppose that in year 2030, investors...Ch. 7 - Stocks vs. bonds Each of the following statements...Ch. 7 - Expected return and standard deviation A game of...Ch. 7 - Standard deviation of returns The following table...Ch. 7 - Average returns and standard deviation During the...Ch. 7 - Prob. 10PS
Ch. 7 - Prob. 11PSCh. 7 - Diversification Here are the percentage returns on...Ch. 7 - Risk and diversification In which of the following...Ch. 7 - Prob. 14PSCh. 7 - Portfolio risk To calculate the variance of a...Ch. 7 - Portfolio risk a) How many variance terms and how...Ch. 7 - Portfolio risk Table 7.8 shows standard deviations...Ch. 7 - Portfolio risk Hyacinth Macaw invests 60% of her...Ch. 7 - Stock betas What is the beta of each of the stocks...Ch. 7 - Stock betas There are few, if any, real companies...Ch. 7 - Portfolio betas A portfolio contains equal...Ch. 7 - Portfolio betas Suppose the standard deviation of...Ch. 7 - Portfolio risk Here are some historical data on...Ch. 7 - Portfolio risk Suppose that Treasury bills offer a...
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- Your business manager forwards the following information to you. Your businesses earned a real rate of return of 7.6% last year and inflation for the same period was 9.6%. What was your nominal rate of return using the Fisher Effect? (Note: nominal rates of return can be positive or negative.) (Round to 100th of a percent and enter as a percentage, e.g. 12.34% as 12.34.)arrow_forwardInflation is a general increase in prices and may be measured by the Consumer Price Index (CPI). Use Appendix A to answer the questions. a. In Year 1 the CPI was 100; 30 years later, it was 239. What was the annual rate of inflation? Round your answer to the nearest whole number. %arrow_forwardThe following table shows the nominal returns on Brazilian stocks and the rate of inflation. Nominal Return (%) Year Inflation (%) 2012 0.3 7.1 2013 -13.0 7.2 2014 -11.0 7.7 2015 -42.7 12.0 2016 67.5 7.6 2017 28.2 4.2 a. What was the standard deviation of the market retuns? (Use decimals, not percents, in your calculations. Do not ro intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Standard deviation b. Calculate the average real return. (A negative answer should be indicated by a minus sign. Do not round intermediat calculations. Enter your answer as a percent rounded to 2 decimal places) Average real returnarrow_forward
- A stock had a return of 6.8 percent last year. If the inflation rate was 1.2 percent, what was the approximate real return? (Enter your answer as a percent rounded to 1 decimal place.)arrow_forwardThe following table shows the nominal returns on Brazilian stocks and the rate of inflation. Year Nominal Return (%) 2012 0.1 -15.0 -13.0 2013 2014 2015 2016 2017 -43.4 68.2 28.9 Standard deviation a. What was the standard deviation of the market returns? (Use decimals, not percents, in your calculations. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Inflation (%) 7.8 7.9 8.4 12.7 8.3 4.9 Averano real return % b. Calculate the average real return. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places) %arrow_forwardSuppose you own an investment that had a total nominal return of 10.7% last year. If the inflation rate last year was 3.7%, what was your real return (in percent)? (Hint - think of economist Irving Fisher, how would Fisher have answered this question by doing an exact calculation?). . .arrow_forward
- Please include the excel formula You’ve observed the following returns on Pine Computer’s stock over the past five years: 8 percent, −12 percent, 14 percent, 21 percent, and 16 percent. Suppose the average inflation rate over this period was 3.1 percent and the average T-bill rate over the period was 3.9 percent. What was the average real return on the company’s stock? What was the average nominal risk premium on the company’s stock over this period? Input area: Year Returns 1 8% 2 -12% 3 14% 4 21% 5 16% Average inflation 3.10% Average T-bill rate 3.90% (Use cells A6 to B13 from the given information to complete this question. You must use the built-in Excel function to answer this question. Make sure to use the “sample” Excel formula.)…arrow_forwardOver the past 4 years, large-company stocks and U.S. Treasury bills have produced the returns stated below. During this period, inflation averaged 1.5 percent. Given this information, the average real rate of return on large-company stocks was ___ percent as compared to _____ percent for Treasury bills. Year 1 Year 2 Year 3 Year 4 Return (Large Cap Stocks) 12% 9% 6% 3% Return (U.S. Tsy-bills) 4% 2% 1% 1% Group of answer choices 5.9; -0.5 6.5; -0.5 5.9; 0.5 6.5; 0.5 6.5; 0.0arrow_forwardInflation, nominal interest rates, and real rates. From 1991 to 2000, the U.S. economy had an annual inflation rate of around 3.88%. The historical annual nominal risk-free rate for this same period was around 5.98%. Using the approximate nominal interest rate equation and the true nominal interest rate equation, compute the real interest rate for that decade. What is the estimated real interest rate using the approximate nominal interest rate equation for that decade? % (Round to two decimal places.)arrow_forward
- The following are annual rates of return for T-bills in Ghana and Share on the Ghana Stock exchange Year T-bill Shares on Ghana Stock Exchange2016 0.063 0.1502017 0.081 0.0432018 0.076 0.3742019 0.090 0.1922020 0.085 0.106a. Compute the arithmetic mean rate of return and standard deviation of rates of return for the two series. b. Discuss these two alternative investments in terms of their arithmetic average rates of return, their absolute risk, and their relative risk. c. Compute the geometric mean rate of return for each of these investments. Compare the arithmetic mean return and geometric mean return for each investment and discuss the difference between mean returns as related to the standard deviation of each series.arrow_forwardAn investor earned 12% last year, a year when actual inflation was 9% and was expected to have been 6%. What was the investor's realized rate of return?arrow_forwardUse the following information on states of the economy and stock returns to calculate the standard deviation of returns. Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. State of Economy Recession Normal Boom Standard deviation Probability of State of Economy 0.60 0.25 0.15 4.42% Security Return if State Occurs -5.00% 13.00 17.00arrow_forward
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