An analyst observes that the historic geometric returns are 9% for equities,3% for treasury bills, and 2% for inflation. The real rate of return and risk premium for equities are closest to:
B is correct. (1 + 0.09)/(1 + 0.02) - 1 = 6.9% (1 + 0.069)/(1 + 0.03) - 1 = 3.8%.