EAR 417 Currently, the nominal risk-free rate is 4.4 percent, the market risk pr
ID: 1175859 • Letter: E
Question
EAR 417 Currently, the nominal risk-free rate is 4.4 percent, the market risk premium is 5.3 percent, and the beta for XYZ's stock is 1.5. Inflation is expected to decrease by 2.1 percentage points and investors' risk version is expected to increase by 1.3 percentage points. If these changes happen, what would the eturn be on an average stock? . 12.2 percent . 9.8 percent . 14.3 percent . 10.5 percent 8.9 percent t l, 3 n order to buy a house, Ryan Roebuck is going to borrow $355,000 today with a 4.50 percent nomi nnual rate of interest. He is going to make monthly payments over 30 years. Assume full amortizati f the loan. If he pays an extra $400 toward principal each month, what will be the ending balance af vo monthly payments? (Round to the nearest cent.)Explanation / Answer
Nominal Risk Free Rate = 4,4 % , Reduction in Inflation Rate = 2.1 %
Reduced Nominal Risk Free Rate = (1.044) / (1.021) - 1 = 0.0225
Market Risk Premium = 5.3 % or 0.053
Beta = 1.5 and Risk Aversion Increases by 1.3 % points which implies that the investor becomes more risk averse, thereby taking less risk and should expect less returns. Reduction in returns will be equal to the reduction in risk aversion.
Therefore, Average Stock Return = 0.0225 + 0.053 x 1.5 - 0.013 = 0.089 or 8.9 %
Hence, the correct option is (e).
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