You expect the inflation rate to be 2.9 percent and the U.S. Treasury bill yield to be 3.7 percent for the next year. The risk premium on small-company stocks is 12.6 percent. What nominal rate of return do you expect to earn on small-company stocks next year?

Question

Quizplus · Accepted Answer

Nominal rate of return = Inflation rate + Real rate of return + Risk premium
Real rate of return = Treasury bill yield - Inflation rate = 3.7% - 2.9% = 0.8%
Nominal rate of return = 2.9% + 0.8% + 12.6% = 16.3%

You Expect the Inflation Rate to Be 2