1. The risk-free rate is 7% and expected inflation is 4.5%. If inflation expectations change such that future expected inflation rises to 5.5%, what will the new risk-free rate be?
2. Calculate the holding period return (HPR) for the two investment alternatives given on page 114. Which, if any, of the return components is likely not to be realised if you continue to hold each of the investments beyond one year? Which vehicle would you prefer, assuming they are of equal risk? Explain.