Question

The following table shows the nominal returns on U.S. stocks and the rate of inflation. Year Nominal Return (%) Inflation (%) 2010 13.6 3.7 2011 8.6 2.8 2012 16.0 3.3 2013 4.1 4.4 2014 −40.2 .4 a. What was the standard deviation of the nominal market returns? (Do not make the adjustment for degrees of freedom described in footnote 18.) (Use decimals, not percents, in your calculations. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Standard deviation % b. Calculate the arithmetic 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.) Average real return %

Answer 1

First we enter the data into Excel as shown below :

(a) To compute standard deviation of nominal market returns, we use the STDEV function in Excel and pass the nominal returns column into the argument as shown below :

Thus, standard deviation is calculated as 23.17 %

(b) Now, we compute real return % as :

Real Return % = (1 + Nominal Return %) / (1 + Inflation %) - 1

Now, we use the AVERAGE function in Excel to compute the arithmetic mean of the real return %

arithmetic average real return = - 2.65 %