TABLE 12.2Average Annual Returns: 1926-2016 Investment Average Return Large-company stocks 12.0% Small-company stocks 16.6 Long-term corporate bonds 6.3 Long-term government bonds 6.0 U. S. Treasury bills 3.4 Inflation 3.0 Source: Morningstar, 2017, author calculations a. What was the average annual return on large-company stock from 1926 through 2016 in nominal terms? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e. g., 32.16.) b. What was the average annual return on large-company stock from 1926 through 2016 in real terms? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e. g., 32.16.)

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10 March, 04:34

TABLE 12.2Average Annual Returns: 1926-2016 Investment Average Return Large-company stocks 12.0% Small-company stocks 16.6 Long-term corporate bonds 6.3 Long-term government bonds 6.0 U. S. Treasury bills 3.4 Inflation 3.0 Source: Morningstar, 2017, author calculations a. What was the average annual return on large-company stock from 1926 through 2016 in nominal terms? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e. g., 32.16.) b. What was the average annual return on large-company stock from 1926 through 2016 in real terms? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e. g., 32.16.)

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Answers (1)

Know the Answer?

Giovanni Norris · Answer 1

a. 12%

b. 8.74%

Explanation:

The computations are shown below:

a. The average annual return on large company stock from 1926 through 2016 is 12% which is already mentioned in the question

b. Real rate of return = { (1 + nominal rate of return) : (1 + inflation rate) } - 1

= { (1 + 0.12) : (1 + 0.03) } - 1

= (1.12 : 1.03) - 1

= 1.08737 - 1

= 0.08737

= 8.74%