Question

During the past year, you had a portfolio that contained U.S. government T-bills, long-term government bonds, and common stocks. The rates of return on each of them were as follows:

U.S. government T-bills	4.90	%
U.S. government long-term bonds	6.70
U.S. common stocks	8.50

During the year, the consumer price index, which measures the rate of inflation, went from 100 to 115 (1982 – 1984 = 100). Compute the rate of inflation during this year. Round your answer to one decimal place.

  %

Compute the real rates of return on each of the investments in your portfolio based on the inflation rate. Use a minus sign to enter negative values, if any. Do not round intermediate calculations. Round your answers to two decimal places.

	Real rate of return
U.S. government T-bills	%
U.S. government long-term bonds	%
U.S. common stocks	%

Answer 1

	Rate of Inflation during the Year	0.15	(115/100)-1
	Rate of Inflation during the Year	15.00%
	In=Nominal Rate of return
	If=Rate of Inflation
	Ir=Real Rate of return
	(1+Ir)=(1+In)/(1+If)=(1+In)/1.15
		In	A=1+In	B=A/1.15	Ir=B-1	Ir*100
		Nominal Return	1+Nominal Return	1+Real Return	Real Return	Real Return (%)
	U.S. government T-bills	0.049	1.049	0.912174	-0.08783	-8.78%
	U.S. government long-term bonds	0.067	1.067	0.927826	-0.07217	-7.22%
	U.S. common stocks	0.085	1.085	0.943478	-0.05652	-5.65%
		Real Rate of Return
	U.S. government T-bills	-8.78%
	U.S. government long-term bonds	-7.22%
	U.S. common stocks	-5.65%