Over the 10-year period from 1978 through 1987, the compound annual rate of return on U.S. Treasury bills was 9.17%. Over the same time period, the average annual inflation rate was 6.39%. Therefore, the ____.
A) inflation premium was 2.78 percentage points
B) real expected rate of return was 9.17 percentage points
C) realized real rate of return was 2.78 percentage points
D) required rate of return was 6.39 percentage points

Question

Quizplus · Accepted Answer

The realized real rate of return is calculated by subtracting the average annual inflation rate from the compound annual rate of return on the investment. Therefore, 9.17% - 6.39% = 2.78 percentage points, which is the realized real rate of return.

Over the 10-Year Period from 1978 Through 1987, the Compound