Suppose the Real Risk-Free Rate Is 3

Multiple Choice

Suppose the real risk-free rate is 3.50% and the future rate of inflation is expected to be constant at 2.20%.What rate of return would you expect on a 1-year Treasury security,assuming the pure expectations theory is valid? Include cross-product terms,i.e.,if averaging is required,use the geometric average.

A) 5.21%
B) 5.49%
C) 5.78%
D) 6.07%
E) 6.37%