Hugh Wallace has the following information regarding three investment options.Each investment option involves the same one-year period. Which of the following statements regarding these investment options is true?
A) Investment option 1 has the highest nominal rate of return.
B) The expected percent rate of interest during the time of maturity of investment option 3 is 1.48%.
C) Investment option 3 has the highest expected inflation rate and the lowest real rate of return.
D) Adjusted for inflation,investment option 1 is the best choice for Hugh.

Question

Hugh Wallace has the following information regarding three investment options.Each investment option involves the same one-year period.  Which of the following statements regarding these investment options is true?
A) Investment option 1 has the highest nominal rate of return. 
B) The expected percent rate of interest during the time of maturity of investment option 3 is 1.48%. 
C) Investment option 3 has the highest expected inflation rate and the lowest real rate of return. 
D) Adjusted for inflation,investment option 1 is the best choice for Hugh.

Quizplus · Accepted Answer

To compare the investment options, we need to look at the real rate of return, which is the nominal rate of return adjusted for inflation. 
- Investment option 1 has a nominal rate of return of 4.5% and an expected inflation rate of 2.5%, so the real rate of return is 2%.
- Investment option 2 has a nominal rate of return of 2% and an expected inflation rate of 1.5%, so the real rate of return is 0.5%.
- Investment option 3 has a nominal rate of return of 1.5% and an expected inflation rate of 0.02%, so the real rate of return is 1.48%.

Therefore, investment option 1 has the highest real rate of return and is the best choice for Hugh.

Hugh Wallace Has the Following Information Regarding Three Investment Options