Question

Assume that last year the risk free rate equaled 1.75% and the market risk premeium equaled 8.9%. This year the inlatiuon rate has increase 0.7% over last year's expectations and market risk premium has stayed the same. What do you expect?

Answer 1

11.4%

Step-by-step explanation:

Here is the full question :

Assume that last year the risk free rate equaled 1.75% and the Market Risk Premium equaled 8.9%. This year the inflation rate has increased 0.7% over last year's expectations and the Market Risk Premium has stayed the same. What do you expect the return on the market to equal? 7.2% 10.7% 11,4% 6.5% 8.196

Market rate of return = nominal interest rate + market premium

Based on the Fisher's equation :

(1 + nominal rate) = (1 + inflation rate ) x (1 + real rate)

(1.007) x (1.0175) = 1.0246

Nominal rate = 2.46%

Market return = 2.46% + 8.9% = 11.36% = 11.4%