How do you do this? er Secure https://newconnect.mheducation.com/flow/connect.ht

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How do you do this?

er Secure https://newconnect.mheducation.com/flow/connect.html Chapter 5 5 Standard Deviation T-Bills 3.46 1.04 4.45 Inflation 2.45 1.68 3.53 Real T-Bi1l Real T-Bi11 3.81 6.27 2.13 All 0.56 -0.29 e.90 3.12 1.29 3.11 10 Big/ Index e. 83 18.64 Growth 8.79 26.21 (annualized) 7.98 18.58 15.56 28.36 St Suppose that the inflation rate is expected to be 2.45% in the near future using the data provided above, what would be your predictions for the following? (Round your answers to 2 decimal places.) a. The T-bill rate?

Explanation / Answer

From the table, average real rate on T bills = 0.56%

a. T-bill rate : 0.56% (Real rate) + 2.45% (Inflation) = 3.01%

b. Expected return on Big/Value:

3.01% T-bill rate + 11.67% historical risk premium = 14.68%

c. The risk premium on the stock market will remain unchanged. This is becuase the real value is uneffected by inflation.

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