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# Suppose the real risk-free rate, r*, is 2% and investors expect inflation to be 4% next year, 5% the following year, and 7% per year thereafter....

Suppose the real risk-free rate, r*, is 2% and investors expect inflation to be 4% next year, 5% the following year, and 7% per year thereafter. Assume the MRP is zero for Year 1 and increases by 0.1% each year. Compute the quoted, or risk-free, rate of return for Year 1, Year 8, and Year 15.

(Could you please provide a step by step solution so I can learn to do the problems myself?)

Solution:
Risk free rate =2%
Inflation = 1st year 4%, 2nd year 5% and 7% thereafter
MRP = 0.1% each year from second year
r1 = 2+4 = 6%5
r8 = (2+4+5+ (7^6) + (0.1) ^7)/8 = 8.46 %
r15 = (2+4+5+...

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