Question

Given a real rate of interest of 3.2%, an expected inflation premium of 5.1%, and risk premiums for investments A and B of 7.4% and 8.9% respectively, find the following: a. The risk-free rate of return, rf b. The required returns for investments A and B

Answer 1

a. Risk-free rate of return:

= Real rate of return + Inflation premium

= 3.2% + 5.1%

= 8.3%

b. Required return for investment A:

= Risk free rate of return + Risk premium

= 8.3% + 7.4%

= 15.7%

Required return for investment B

= 8.3% + 8.9%

= 17.2%