7. 22.

Calculating Returns [LO 12.2, 12.3] Refer to Table 12.1 in the text and look at the period from 2003 through 2008:

1. Calculate the average return for cash and the average annual inflation rate (consumer price index) for this period.

2. Calculate the standard deviation of cash returns and inflation over this period.

3. Calculate the real return for each year. What is the average real return for cash?

4. Many people consider the cash rate risk-free. What do these calculations tell you about the potential risks of cash?