Suppose the Real Risk-Free Rate Is 3

question 12

Multiple Choice

Suppose the real risk-free rate is 3.50% and the future rate of inflation is expected to be constant at 4.60%.What rate of return would you expect on a 1-year Treasury security,assuming the pure expectations theory is valid? Disregard cross-product terms,i.e. ,if averaging is required,use the arithmetic average.

• A) 6.08%
• B) 10.13%
• C) 7.70%
• D) 8.10%
• E) 7.29%

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