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Business, 20.04.2021 17:20 nofer

Suppose the real risk-free rate is 2.20%, the average expected future inflation rate is 1.50%, and a maturity risk premium of 0.10% per year to maturity applies, i. e., MRP = 0.10%(t), where t is the number of years to maturity, hence the pure expectations theory is NOT valid. What rate of return would you expect on a 5-year Treasury security? Disregard cross-product terms, i. e., if averaging is required, use the arithmetic average.

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