In Problem 15, suppose the average inflation rate over this period was 4.2 per cent and the average T-bill rate over the period was 5.1 per cent.

(a) What was the average real return on British Auto’s shares?

(b) What was the average nominal risk premium on British Auto’s shares?

(c) What was the average real risk-free rate over this time period? What was the average real risk premium?

Problem 15,

You have observed the following prices for British Auto, the luxury car maker, for a number of years. Jan 2006: €26.87; Jan 2007: €35.19; Jan 2008: €32.17; Jan 2009: €37.23; Jan 2010: €46.84; Jan 2011: €36.80; Jan 2012: €18.61; Jan 2013: €30.96; Jan 2014: €56.08; Jan 2015: €65.39. 

The company paid the following dividends: 

2006: €0.52; 2007: €0.58; 2008: €0.62; 

2009: €0.64; 2010: €0.70; 2011: Nil;

2012: €0.30; 2013: €0.30; 2014: Nil.