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Chapter 4

Question 1

Real and money rates

An investor requires a real return on their investment of 12%, but in addition will
need to be compensated for anticipated inflation of 3%.

Calculate the money rate of return required by the investor.

(1 + i) = (1 + r)(1 + h)

r = 0.12, h = 0.03

1 + i = 1.12 × 1.03 = 1.1536

i = 0.1536 or 15.36%

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