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16. What are the limitationsof duration and the portfolio immunization technique?Problems and Issues1.According to the Fisher effect, if the real interest rate is 3 percent and the nominal interest rate is 8 percent, what rate of inflation is the financial marketplace expecting? Explain the reasoning behind your answer. If the nominal rate rises to 11 percent and following the Fisher effect, what would you conclude about the expected inflation rate? The real rate?7-8
Chapter 07 - Inflation, Yield Curve, and Duration: Impact on Interest Rates and Asset Prices2.Mark wants a 3 percent real rate of return to invest in stock XYZ, and a 5 percent real rate of return to invest in stock ABC. Heidi believes that both stocks are less risky than Mark, and is willing to accept real rates of return of 2 percent on XYZ and 4 percent on ABC. Mark expects the inflation rate to be 3 percent and Heidi expects the inflation rate to be 5 percent. If the current yield on both XYZ and ABC is 6 percent, then: