CFA Practice Question

CFA Practice Question

The economy is expected to grow at a real rate of 3% and inflation is projected at 2.5%. The market portfolio commands a risk premium of 4%. What is the estimate for the nominal risk-free rate of return?
A. 5.5%
B. 6.5%
C. 9.5%
Explanation: The real risk-free rate of return is approximately equal to the real growth rate of the economy. The nominal risk-free rate can be approximated as the sum of the real risk-free rate and the rate of inflation. Nominal risk-free rate = 3 + 2.5 = 5.5%

Using this formula, nominal risk-free rate = (1 + 0.03) x (1 + 0.025) - 1 = 5.58%

User Contributed Comments 5

User Comment
uberstyle Note this asks for risk-free rate of return, not risk-adjusted rate of return.
twotwo what if it is adjusted????

sambra note that the required return rate on equity is 9.5%
grezavi If it is adjusted then you add the mkt premium
Clude mkt premium is useless inf.
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