Question

• 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 an expected rate of return of:

• 4% 73.$__________ (be exact)

• 8% 74.$__________ (be exact)

• Total Risk = 75. _________________________+ 76. _________________________

Answer 1

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

FALSE

The real rate plus the inflation premium is equal to the nominal rate of return, not necessarily risk-free.

The risk-free rate of return is the rate offered on T-bills.

Changes in the inflation rate have a direct and pronounced effect on market interest rates.

FALSE

The market interest rate is the nominal rate of return. An increase or decrease in inflation rate does not change the market return directly.

The risk free rate of return considers the expected rate of inflation.

FALSE

The risk free rate of return does not considers the expected rate of inflation.

Margin trading mitigates risk

FALSE

Margin trading increases risk.

An investor needs $750,000, 20 years from now. How much does the investor need to invest today assuming an expected rate of return of:

a) 4%

PV = FV/(1 + r)^n

PV = 750,000/(1 + 0.04)^20

PV = $342,290.209650969

b) 8%

PV = 750,000/(1 + 0.08)^20

PV = $160,911.155553043

Total risk = Systematic risk + Unsystematic risk

Systematic risk is undiversifiable while unsystematic risk is diversifiable.