Question

suppose the real risk - free is 3.50% and the future rate of inflation is expected to be constant at 6.80% . What rateof return would you expect on a 1 yr Treasury security , assuming the pure expectations theory is valid? Disregard cross- product terms, i.e., if averaging is required use the arithmetic average.

Answer 1

6.8% + 3.5% = 10.3%