Suppose 1-year T-bills currently yield 7.40% and the future inflation rate is expected to be constant at 3.00% per year. What is the real risk-free rate of return, r*? Disregard any cross-product terms, i.e., if averaging is required, use the arithmetic average.   a. 4.40%     b. 7.40%     c. 10.40%     d. 7.62%     e. 5.20%

Q: 1. Calculate the forward rate for one year, one year from now f1,1. 2. Calculate the forward rate…

A: 2 year T-bill interest rate=8.00%1 year T-bill rate =6.00%As per unbiased or pure expectation…

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A: Given the following information: Nominal return: 10.6% Return on investment or Real return: 6.3%

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Q: (b)  What is the nominal annual interest rate compounded continu- ously for an annual percentage…

A: In this question we need to compute the nominal annual interest rate compounded continuously for an…

Q: Suppose that the current one-year rate (one-year spot rate) and expected one-year T-bill rates over…

A:

Q: Suppose that the current 1-year rate (1-year spot rate) and expected 1-year T-bill rates over the…

A: According to the unbiased expectations theory, the current (long-term) rate for a specific maturity…

Q: Suppose that the current 1-year rate (1-year spot rate) and expected 1-year T-bill rates over the…

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Q: If you note the following yield curve in The Wall Street Journal, what is the one-year forward rate…

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A: Year 1 current rate = R1Year 1 current rate= 6.00%Year 2 current rate = [{(1+R1)*…

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Q: You want to earn a real rate of return of 6.50% at a time when the inflation rate is 3.25%. What is…

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Q: 1. Assume the following information about a Treasury zero-coupon yield curve today: Maturity (years)…

A: Table showing corresponding rates under semi annual compounding :

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Q: Assume that expected rates of inflation over the next 5 years are 4 percent, 7 percent, 10 percent,…

A: Average inflation rate = ((1+i1)*(1+i2)*(1+i3)*(1+i4)*(1+i5))1/n-1 Where i1 = Inflation rate year 1…

Q: 4) If we require a 10% real return and we expect inflation to be 8%, what is the nominal rate based…

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Q: Suppose that the current one-year rate and expected one-year T-bill rates over the following three…

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Q: What is the nominal rate of return on an investment if the real rate of return is 3.41% and the…

A: Real Rate of Return = 3.41%Inflation Rate = 2.50%

Risk and return

Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary. 

Capital Asset Pricing Model

Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.