Carl Foster, a trainee at an investment backing firm, is trying to get an idea o
ID: 2680903 • Letter: C
Question
Carl Foster, a trainee at an investment backing firm, is trying to get an idea of what real rate of return investors are expecting in today's marketplace. He has looked up the rate paid on 3-month U.S. Treasury bills and found it to be 5.5%. He has decided to use the rate of change in the Consumer Price Index as a proxy for the inflationary expectations of investors. That annualized rate now stands at 3%. On the basis of the information that Carl has collected, what estimate can he make of the real rate of return?Explanation / Answer
real rate of return = 5.5 -3 = 2.5% approx assuming 5.5% on 3-month t-bills is an annualized rate and there will be some risk premium if he chose anything other than t-bills because t-bills are free of default risk. sorry i confused with last post