An investment offers a total return of 13 percent over the coming year

Finance Oct 08, 2020

An investment offers a total return of 13 percent over the coming year. Alex Hamilton thinks the total real return on this investment will be only 7.5 percent.

What does Alex believe the inflation rate will be over the next year? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Expert Solution

Computation of the inflation rate:-

(1 + Total return) = (1 + Real return) * (1 + Inflation rate)

(1 + 13%) = (1 + 7.5%) * (1 + Inflation rate)

(1 + inflation rate) = (1 + 13%) / (1 + 7.5%)

Inflation rate = 1.0512 - 1

= 5.12%

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