The expected inflation rate in Finland is one % while it is three % in the U.S. A risk-free asset in the U.S. is yielding 6.25 %. What approximate real rate of return should you expect on a risk-free Norwegian security?

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The real rate of return can be approximated using the Fisher equation, which states that the nominal interest rate (i) is approximately equal to the real interest rate (r) plus the inflation rate (π), or i ≈ r + π. Given the U.S. nominal rate is 6.25% and its inflation rate is 3%, the real rate of return in the U.S. is approximately 3.25% (6.25% - 3%). Since risk-free rates in developed countries are often similar when adjusted for inflation, the expected real rate of return on a risk-free Norwegian security would also be approximately 3.25%, assuming no significant difference in risk and that capital markets are efficient.

The Expected Inflation Rate in Finland Is One % While