Suppose the real risk-free rate is 2.50% and the future rate of inflation is expected to be constant at 3.80%. What rate of return would you expect on a 5-year Treasury security, assuming the pure expectations theory is valid? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.
1. 6.30%
2. 5.17%
3. 7.18%
4. 7.25%
5. 5.80%