The nominal rate of return is made up of a risk-free element when there is no expected inflation, a business-risk element, and an inflation element.

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Quizplus · Accepted Answer

The nominal rate of return is indeed made up of a risk-free element (when there is no expected inflation), a business-risk element, and an inflation element. The risk-free element accounts for the time value of money, while the business-risk element reflects the returns investors expect for taking on the risk associated with a particular investment. The inflation element represents the compensation investors require for the expected erosion of purchasing power caused by inflation.

The Nominal Rate of Return Is Made Up of a Risk-Free