Average Annual Returns: 1926–2016 Investment Average Return Large-company stocks Small-company stocks Long-term corporate bonds Long-term government bonds uS. Treasury bills Inflation 12.0% 16.6 6.3...

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Extracted text: Average Annual Returns: 1926–2016 Investment Average Return Large-company stocks Small-company stocks Long-term corporate bonds Long-term government bonds uS. Treasury bills Inflation 12.0% 16.6 6.3 6.0 3.4 3.0 5. Nominal versus Real Returns [LO2] What was the average annual return on large-company stocks from 1926 through 2016: a. In nominal terms? b. In real terms? 6. Bond Returns [LO2] What is the historical real return on long-term government bonds? On long-tem corporate bonds? Rzr+h 7.4 EXAMPLE 7.5 |The Fisher Effect If investors require a 10 percent real rate of return, and the inflation rate is 8 percent, what must be the approximate nominal rate? The exact nominal rate? The nominal rate is approximately equal to the sum of the real rate and the inflation rate: 10% + 8% = 18%. From the Fisher effect, we have: 1+R = (1+r) × (1+h) = 1.10 x 1.08 = 1.1880 %3D Therefore, the nominal rate will actually be closer to 19 percent.