You are given the following long-run annual rates of return for alternative investment instruments: U.S. Government T-bills 3.50 % Large-cap common stock 11.90 Long-term corporate bonds 5.75 Long-term government bonds 4.50 Small-capitalization common stock 13.40 The annual rate of inflation during this period was 3 percent. Compute the real rate of return on these investment alternatives. Do not round intermediate calculations. Round your answers to two decimal places. Real Rate of Return U.S. Government T-bills: % Large-cap common stock: % Long-term corporate bonds: % Long-term government bonds: % Small-capitalization common stock: %

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Answer and Explanation:

The computation of the real rate of return on these investment alternatives is presented with the help of a spreadsheet which is attached below:-

The formula is presented below:-

Real rate of return = (1 + Nominal rate) รท (1 + Inflation rate) - 1

U.S. Government T-bills = 0.49%

Large-cap common stock = 8.64%

Long-term corporate bonds = 2.67%

Long-term government bonds = 1.46%

Small-capitalization common stock = 10.10%

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