Part A. What would be the required rate of return on an investment in an economy with a 3% real rate of return, expected inflation of 4%, and a risk premium of 4%? What would you expect $1000 invested at this rate to grow to after ten years? After twenty years?

Part B. Compute the required rate of return under the following scenarios:

a) Real rate =5%, expected inflation =6%, risk premium=2%

b) Real rate =3%, expected inflation =8%, risk premium=3%

c) Real rate =4%, price index expected to change from 145 to 151, risk premium =5%

Answer rating: 100% (QA)

Part A To calculate the required rate of return we need to add the real rate of return expected infl... View the full answer