The nominal risk-free rate is best described as the sum of the real risk-free rate and a premium for:A.maturity.B.liquidity.C.expected inflation.
Question
The nominal risk-free rate is best described as the sum of the real risk-free rate and a premium for:A.maturity.B.liquidity.C.expected inflation.
Solution
The nominal risk-free rate is best described as the sum of the real risk-free rate and a premium for expected inflation.
Here's the step-by-step explanation:
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The real risk-free rate is the theoretical rate of return of an investment with zero risk, assuming no inflation. It's the minimum return an investor expects for any investment because they won't bear any risk unless the potential rate of return is greater than the risk-free rate.
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The inflation premium is the additional return an investor requires for holding an investment that is not risk-free. It's the compensation for the expected inflation over the investment period.
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The nominal risk-free rate is the sum of the real risk-free rate and the inflation premium. This is because the nominal rate represents the rate of return that an investor expects to earn after considering the effects of inflation.
So, the answer is C. expected inflation.
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