An Investor Requires a 3% Increase in Purchasing Power in Order

question 1

Multiple Choice

An investor requires a 3% increase in purchasing power in order to induce her to lend. She expects inflation to be 2% next year. The nominal rate she much charge is about

• A) 3%
• B) 2%
• C) 1%
• D) 5%
• E) 7%

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Definitions:

Asset-specific Risk

Refers to the risk affecting an investment's value that is associated with the particular assets the investment owns, distinct from marketwide risks.

Specific Risk

The risk associated with a particular company or sector, which can be mitigated through diversification.

Market Risk Premium

Market Risk Premium is the additional return an investor expects from holding a risky market portfolio instead of risk-free assets.

Risk-free Rate of Return

The anticipated profit from a riskless investment, usually tied to government treasuries.