HW2 - Econ 4751 HW 2 Due on Thursday 10/15/2009 Learning...

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Econ 4751 HW 2 Due on Thursday 10/15/2009 Learning about Return and Risk from the Historical Record 1 . (15 ’) A) Over the past year you earned a nominal rate of interest of 10 percent on your money. The inflation rate was 5 percent over the same period. What’s the exact actual growth rate of your purchasing power? B) If the annual real rate of interest is 2.5% and the expected inflation rate is 3.7%, the nominal rate of interest would be? C) Derive a condition/relation on nominal interest rate and inflation rate, such that real interest rate is positive.
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2. (10 ’) A) An investment provides a 1.25% return quarterly, its effective annual rate is? B) Describe the steps you use to calculate the approximate EAR when APR is compounded very frequently. Write down mathematical equations/theorems needed.
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(15’) You have been given this probability distribution for the holding period return for KMP stock: A)What is the expected holding period return for KMP stock? B)
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HW2 - Econ 4751 HW 2 Due on Thursday 10/15/2009 Learning...

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