Problem:

You've observed the following returns on Crash-n-Burn Computer's stock over the past five years: 10 percent, -11 percent, 18 percent, 19 percent, and 10 percent. Suppose the average inflation rate over this period was 2.2 percent and the average T-bill rate over the period was 4.7 percent.

Required:

Question 1: What was the average real risk-free rate over this time period?

Question 2: What was the average real risk premium?

Note: Be sure to show how you arrived at your answer.