Suppose the Real Risk-Free Rate Is 3

question 77

Multiple Choice

Suppose the real risk-free rate is 3.50% and the future rate of inflation is expected to be constant at 2.20%.What rate of return would you expect on a 1-year Treasury security,assuming the pure expectations theory is valid? Include cross-product terms,i.e.,if averaging is required,use the geometric average.

• A)5.21%
• B)5.49%
• C)5.78%
• D)6.07%
• E)6.37%

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