Using Historical Stock Prices to Calculate Returns

Go to finance.yahoo.com, enter a stock symbol and click on Get Quotes. (You can use Symbol Lookup if you need to find a stock symbol.) When the results appear, click on Historical Prices in the Quotes menu. Set the Date Range with yesterday as the End Date and one year prior to that as the Start Date. Select the Monthly option and click on Get Prices. Use the Adjusted Close prices to calculate monthly returns for the past 12 months.

1. Calculate the arithmetic average monthly return on the stock.
2. Calculate the geometric average monthly return.
3. Calculate the APR for the stock on the basis of the arithmetic average monthly return.
4. Calculate the stock's EAR.

Inflation and Interest Rates

Calculating the real rate of return is an important part of evaluating an investment's performance. To do this, you need to know the nominal yield on your investment and the rate of inflation during the corresponding period. To estimate the expected real rate of return before you make an investment, you can use the promised yield and the expected inflation rate.

1. Go to www.bankrate.com and click on the CDs and Investments tab. Find today's nominal 1-year CD rate in the table.
2. Use the St. Louis Federal Reserve's website at research.stlouisfed.org/fred2 as a source for data about expected inflation. Search for “inflation”, then locate the University of Michigan Inflation Expectation data series (MICH). Click on the View Data link and find the latest available data point. What is the expected inflation rate for the next year?
3. On the basis of your answers to parts 1 and 2, calculate the expected real rate of return on a 1-year CD investment.