Strayer University

Running head: RISK ASSESMENT, PORTFOLIO MANAGEMENT

FIN550: Risk Assessment, Portfolio Management

Patel Nayan Kumar

Strayer University

FIN550/Spring -2010/Assessment #2

Professor Dr. Gary Bliss

April 30, 2010

Q-1. You are given the following long-run annual rates of return for alternative investment instruments:

• US Government T-Bills 3.6%

• Large-cap common stocks 12.2%

• Long-term corporate bonds 6.1%

• Long-term government bonds 5.4%

• Small-capitalization common stock 13.6%

The annual rate of inflation during the period was 3.1%. Compute the real rate of

Return on these investment alternatives.

The Real rate of return is basic interest rate ,assuming no inflation .It is also know as real risk free rate RRFR.

It is calculated by RRFR = [(1+NRFR of return)/ (1+ Rate of Inflation)] -1

Where NRFR= Nominal risk free rate

US Government T-Bill

NRFR =3.6%, Inflation =3.1% than

RRFR = [(1+0.036)/ (1+0.031)] -1

= [(1.036)/ (1.031)]-1

=1.00484 -1

=0.00484 or 0.484%

Similarly for alternative investment instrument calculated as below

| |NRFR |1+NRFR |1+Inflation | RRFR |

| US Government T-Bills |3.6% |103.60% |103.10% |0.485% |

|  Large-cap common stocks |12.2% |112.20% |103.10% |8.826% |

|Long-term corporate bonds |6.1% |106.10% |103.10% |2.910% |

| Long-term government bonds |5.4% |105.40% |103.10% |2.231% |

|...