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Given a real rate of interest of 2
Given a real rate of interest of 2.0%, an expected inflation premium of 3.0%, and risk premiums for investments A and B of 4.0% and 6.0% respectively, find the following: a. The risk-free rate of return, rf b. The required returns for investments A and B
a. The risk-free rate of return is
%. (Round to one decimal place.)
Expert Solution
a) Computation of Risk-free Rate of Return:
Risk-free Rate of Return = Real Rate of Interest + Expected Inflation Premium
= 2.0% + 3.0%
= 5.0%
b) Computation of Required Return for Investment:
Required Return for Investment = Risk-free Rate of Return + Risk Premium
Required return for investment A = 5.0% + 4.0%= 9.0%
Required return for investment B = 5.0% + 6.0%= 11.0%
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