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**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%

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**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. |