Final answer:
The nominal risk-free rate is the sum of the real risk-free rate and a premium for inflation, which compensates for the reduced purchasing power of money over time.
Step-by-step explanation:
The nominal risk-free rate is best described as the sum of the real risk-free rate and a premium for inflation. The real risk-free rate represents the return on an investment with no risk in a world without inflation. The inflation premium is added to compensate investors for the decrease in purchasing power of money as prices rise over time. This does not include premiums for other types of risks such as default risk, market risk, or liquidity risk. Therefore, when considering the components of the nominal risk-free rate, inflation is the correct premium that is added to the real risk-free rate.