The market portfolio of common stocks earned 20.4% last year.Treasury bills earned 5.3% on average last year.The average inflation rate was 2.5%.What was the real return on T-Bills?

A)2.8%.
B)5.3%
C)7.8%
D)3.9%

Question

The market portfolio of common stocks earned 20.4% last year.Treasury bills earned 5.3% on average last year.The average inflation rate was 2.5%.What was the real return on T-Bills?

A)2.8%.
B)5.3%
C)7.8%
D)3.9%

Quizplus · Accepted Answer

The real return on T-Bills can be calculated as:
Real return = (1 + nominal return) / (1 + inflation rate) - 1
Real return = (1 + 5.3%) / (1 + 2.5%) - 1
Real return = 2.8%
Therefore, the correct answer is A) 2.8%.

The Market Portfolio of Common Stocks Earned 20