If an investor forecasts a future inflation rate of 5% and requires a 3% real return, he will require a nominal return of
A) 2%.
B) 15%.
C) 8%.
D) 16.7%.

Question

Quizplus · Accepted Answer

The investor would require a nominal return of 8% to achieve a 3% real return with a forecasted inflation rate of 5%. This is calculated using the Fisher equation: (1 + nominal rate) = (1 + real rate) * (1 + inflation rate), which simplifies to 1 + nominal rate = 1.03 * 1.05 = 1.08, or an 8% nominal rate.

If an Investor Forecasts a Future Inflation Rate of 5