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Ch05 revised

Ch05 revised - A premium the difference between two rates...

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CHAPTER 5: HISTORY OF INTEREST RATES AND RISK PREMIUMS 9. Here is the answer provided in the instructor’s manual: From Table 5.2, the average real rate on T-bills has been approximately: 3.82% – 3.14% = 0.68% a. T-bills: 0.68% real rate + 3% inflation = 3.68% b. Expected return on large stocks: 3.68% T-bill rate + 8.22% historical risk premium = 11.90% c. The risk premium on stocks remains unchanged.
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Unformatted text preview: A premium, the difference between two rates, is a real value, unaffected by inflation. The problem here is that the authors are assuming that you estimate expected returns from historical returns. By the time you finish the 3 rd class session, you should clearly understand the folly in that approach. 5-1...
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