farrukhsadiq

I think there's an error there. Exactly same question is in practice problems for reading 52 of vol 4 curicullum (question 11-14, p.380). In curriculum calculation is correct.

So to calrify again:
Rnom - nominal rate of return
Rf- risk free rate
Rp- risk premium
Rinf - inflation rate

(1+Rnom)=(1+Rp)(1+Rf)(1+Rinf)
If you divide both sides by (1+Rinf) you get
(1+Rnom)/(1+Rinf)=(1+Rp)(1+Rf) =>is called real rate of return

Now coming back to mock - real rate of return for equities is:
1.09/1.02 =1.0686 which is ok

However in order to get Rp for equities you need to:
(1+Rnom)/[(1+Rf)(1+Rinf)] where (1+Rf)(1+Rinf) is equivalent to 3% (treasury bills for which Rp=0)
so (1.09)/(1.03) = 1.0582 => correct answer should be C

As I said, in curriculum they calculate it correctly, no idea why mistake here, hope they will make it correctly for real exam.

Edit: BTW they posted errata to this specific question on www with mocks. So we're both right and they have corrected it



Edited 1 time(s). Last edit at Wednesday, June 1, 2011 at 06:14PM by dadalsky.