Welcome to Westonci.ca, where your questions are met with accurate answers from a community of experts and enthusiasts. Our Q&A platform provides quick and trustworthy answers to your questions from experienced professionals in different areas of expertise. Join our platform to connect with experts ready to provide precise answers to your questions in different areas.

An analyst observes that the historic geometric nominal return for equities is 9%. Given a real return of 1% for riskless Treasury bills and annual inflation of 2%, the real rate of return and risk premium for equities are closest to:

Sagot :

Answer:

Real rate of return= 6.9%

Risk premium for equities= 5.8%.

Explanation:

Calculation to determine what the real rate of return and risk premium for equities are closest to:

Real rate of return =(1 + 0.09)/(1 + 0.02) - 1

Real rate of return=1.09/(1.02)-1

Real rate of return= 6.9%

Risk premium for equities=(1 + 0.09)/(1 + 0.01) - 1

Risk premium for equities=1.09/(1.01)-1

Risk premium for equities= 5.8%

Therefore the real rate of return and risk premium for equities are closest to:

Real rate of return 6.9%

Risk premium for equities 5.8%