An analyst is evaluating securities in a developing nationwhere the inflation rate is very high. As a result, the analyst has been warned not to ignorethe cross-product between the real rate and inflation. A 6-year security with no maturity,default, or liquidity risk has a yield of 20.84%. If the real risk-free rate is 6%, what averagerate of inflation is expected in this country over the next 6 years?
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
An analyst is evaluating securities in a developing nation
where the inflation rate is very high. As a result, the analyst has been warned not to ignore
the cross-product between the real rate and inflation. A 6-year security with no maturity,
default, or liquidity risk has a yield of 20.84%. If the real risk-free rate is 6%, what average
rate of inflation is expected in this country over the next 6 years?
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