What is meant by the following terminologies identified with the return and risk modeling? Real Rate...

What is meant by the following terminologies identified with the return and risk modeling?

Real Rate of Interest
The risk-free rate of return and give an example
Inflation Premium
Risk Premium
Maturity Risk Premium

Expert Solution

A. Real risk free rate is the risk-free rate without inclusion of the inflation value in the overall risk free rate and these real risk free rate will only be calculated after excluding the effect of inflation from the nominal risk free rate.

B. risk free rate of return is the rate of return which will be earned by the investor on securities without taking any kind of risk and these security will not have any kind of default risk.

For example,United States treasury are considered risk free and rate of return generated on treasuries are risk free rate of return

C. inflation premium is the overall inflation which will be included in the nominal rate of return and it is added with the real risk free rate of return in order to arrive at nominal rate of return and it is the overall inflationary value expected in different years

D. Risk premium is the additional rate of return which will be required for taking risky investment into different securities, for example, if we are investing into the stock then the additional rate of return we will demand over risk free rate is the risk premium.

E. Maturity risk premium is the risk associated with the higher maturity of the securities because the investors will be exposed to higher risk for investing into higher maturities as future is highly risky and and hence he will require higher return for investment into securities with higher maturity.

jeff jeffy answered 2 years ago

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