An analyst observes the following historic geometric returns: Asset Class Geometric Return (%) Corporate Bonds 5.5 Equities 8.5 Treasury bills 3.5 Inflation 2.1 The real rate of return for Corporate Bonds is closest to: Question 11Answera.3.33%b.3.40%c.1.03%
Question
An analyst observes the following historic geometric returns: Asset Class Geometric Return (%) Corporate Bonds 5.5 Equities 8.5 Treasury bills 3.5 Inflation 2.1 The real rate of return for Corporate Bonds is closest to: Question 11Answera.3.33%b.3.40%c.1.03%
Solution
The real rate of return is calculated by subtracting the inflation rate from the nominal (or observed) rate of return. In this case, to find the real rate of return for Corporate Bonds, you would subtract the inflation rate from the geometric return of the Corporate Bonds.
Here's the calculation:
Geometric Return of Corporate Bonds = 5.5% Inflation = 2.1%
Real Rate of Return = Geometric Return - Inflation Real Rate of Return = 5.5% - 2.1% = 3.4%
So, the real rate of return for Corporate Bonds is closest to 3.4%. Therefore, the answer is b. 3.40%.
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