Nominal Required Rate and Factors Determining It | CFA Level 1 Exam Prep

Factors Determining the Nominal Required Rate | CFA Level 1 Exam

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Question

The nominal required rate is determined by the inflation premium, the risk premium, and the:

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A. B. C. D.

B

The equation for the nominal risk free rate is:

RequiredReturnnominal= [(1 + Risk-FreeRatereal) * (1 + Inflation Premium) * (1 + Risk Premium)] - 1

The market risk premium is used when determining the security market line (SML) and equals the required market return minus the nominal risk-free rate. Liquidity risk is a part of total risk which is measured by the risk premium. The exchange rate is not a factor in this calculation.