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

Solutions

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

Next > < Previous

Related Solutions

1. What is meant by the real exchange rate? What behaviors of the real exchange rate...

1. What is meant by the real exchange rate? What behaviors of the real exchange rate led economists to reject strong versions of PPP? 2. What is meant by a half-life? Why did Rogoff think half-lives are too long?

Is business risk the same as financial risk and interest rate risk? How about real return,...

Is business risk the same as financial risk and interest rate risk? How about real return, expected return, and profits? Can you show how expected return is calculated?

Assume that the real risk-free rate of return, r*, is 1%, and it will remain at...

Assume that the real risk-free rate of return, r*, is 1%, and it will remain at that level far into the future. Also assume that maturity risk premium on Treasury bonds increase from zero for bonds that mature in one year or less to a maximum of 2%, and MRP increases by 0.2% for each year to maturity that is greater than one year – that is, MRP equals 0.2% for two-year bond, 0.4% for a three-year bond, and so...

1) Which of the following two statements is correct? S1: The real risk-free rate of return...

1) Which of the following two statements is correct? S1: The real risk-free rate of return captures a bond’s liquidity risk. S2: Holding all else equal, bonds with call provisions are more likely to get called by the bond issuer after substantial interest rate increases. Group of answer choices Both statements are true S2 is true but S1 is false S1 is true but S2 is false Both statements are false 2) Which of the following statements is correct? S1:...

The risk-free rate of return is equal to the real rate plus the inflation premium. True...

The risk-free rate of return is equal to the real rate plus the inflation premium. True or False? 69._________ Changes in the inflation rate have a direct and pronounced effect on market interest rates. True or False? 70.____________ The risk free rate of return considers the expected rate of inflation. True or False? 71.________ Margin trading mitigates risk. True or False? 72._________ An investor needs $750,000, 20 years from now. How much does the investor need to invest today assuming...

Explain what is meant by beta. What type of risk does beta measure? What is the market return?

Explain what is meant by beta. What type of risk does beta measure? What is the market return? How is the interpretation of beta related to the market return?

Risk free rate of return is 5% & required rate of return on the market is...

Risk free rate of return is 5% & required rate of return on the market is 9%. What is the security market line? If corporate beta is 1.8 what does that mean?

If the risk-free rate is 5% and the return on the market is 10%, what is...

If the risk-free rate is 5% and the return on the market is 10%, what is alpha equal to for a stock with a beta of 2 that has an expected return of 15%?

The risk-free rate is 2% and the return on the market is 12%, what is the...

The risk-free rate is 2% and the return on the market is 12%, what is the required rate of return on the following portfolio? Stock Amount Invested Beta A $6,000 0.6 B $9,000 1.8 C $5,000 1.2 11.48% 13.16% 14.90% 12.52% 15.71%

Compute the real rates of return for the following situations assuming that the inflation rate is...

Compute the real rates of return for the following situations assuming that the inflation rate is 2 percent. Compute the real rates of return if the rate of inflation was 6 percent. Use a minus sign to enter negative values, if any. Do not round intermediate calculations. Round your answers to one decimal places. On February 1, you bought 120 shares of stock in the Francesca Corporation for $41 a share and a year later you sold it for $46...

Subjects