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Which one of the following statements is correct? The risk-free rate is zero if inflation is...

Which one of the following statements is correct?

The risk-free rate is zero if inflation is equal to the nominal rate
Any return greater than the inflation rate represents the risk premium.
Inflation rates are always positive.
Nominal rates exceed real rates by the amount of the risk-free rate.
The real rate is negative if inflation exceeds the nominal rate
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Homework Answers

Answer #1

E.The real rate is negative if inflation exceeds the nominal rate.

Real risk free tate will not be zero if inflation is equal to nominal rate.(so A is incorrect).

return greater than the inflation rate does not represent the risk premium...(so B is incorrect).

Inflation rates can even be negative (so C is incorrect).

Nominal rates exceed real rates by inflation and not risk free rate. (so D is incorrect).

The real rate will be negative if inflation exceeds the nominal rate.

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