Homework Answers
The 30 year fixed rate US treasury bills give us the nominal rate of Risk free Return = 3.01%
and the TIPS yield gives us the real risk free rate of return = 0.99%
So, inflation rate is approximately = 3.01%-0.99% = 2.02%
19. Now Real long term return = 1/ (P/E) = 1/18 = 0.05555 = 5.56%
So, nominal long term return on stock market = 5.56%+2.02% = 7.58% (B)
20. Market risk premium = nominal long term return on stock market -nominal rate of Risk free Return
= 7.58%- 3.01% = 4.57% (E)
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