An Investor Anticipates That Inflation Will Be 5 Per Cent

Multiple Choice

An investor anticipates that inflation will be 5 per cent over the next year, and expects a return of 2 per cent for the pure time value of money. She also expects a risk premium of 4 per cent per year. What overall return is required in the first year?

A) 11%
B) 12.1%
C) 14%
D) 11.1%