Suppose the Real Risk-Free Rate Is 3

question 8

Multiple Choice

Suppose the real risk-free rate is 3.00%,the average expected future inflation rate is 4.00%,and a maturity risk premium of 0.10% per year to maturity applies,i.e. ,MRP = 0.10%(t) ,where t is the years to maturity.What rate of return would you expect on a 1-year Treasury security,assuming the pure expectations theory is NOT valid? Include the cross-product term,i.e. ,if averaging is required,use the geometric average.(Round your final answer to 2 decimal places. )

• A) 8.88%
• B) 7.15%
• C) 7.22%
• D) 7.80%
• E) 8.95%

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Definitions:

Two-tail Test

A statistical test where the critical area of a distribution is two-sided and tests whether a sample is greater than or less than a certain range of values.

P-value

The probability of observing results as extreme as those observed in a study, under the assumption that the null hypothesis is true.

Null Hypothesis

A hypothesis in statistical analysis that assumes no significant difference or effect exists between specified populations or parameters.

Statistical Significance

An indication that the results observed in a study or experiment are unlikely to occur by chance alone, according to a predetermined threshold.