Question

If real return on U.S. Treasury bills is 13 percent while the rate of expected inflation is 9 percent, then what should nominal rate of return be?

The expected return on Bto stock is 13.2 percent. If the expected return on the market is 10 percent and the beta for Bto is 1.8, then what is the risk-free rate?

Answer 1

Nomial Rate of Return = (1+ Real Rate of Return) * (1+Inflation Rate) - 1

= (1+0.13) * (1+0.09) - 1

= 1.2317 - 1

= 0.2317 OR 23.17%

Let Risk Free Return is X

Expected Return =

    13.2   = X + 1.8 (10% - X)

    13.2   = X + 18%  - 1.8*X

    13.2   = 18%  - 0.8*X

    X = (18% -13.2%) 0.8

    X = (18% -13.2%) 0.8

    X = 6%

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