Which of the following statements regarding real risk-free rate of return (RRFR) and the nominal risk free rate of return (NRFR) are accurate: I. Contrary to the NRFR, and RRFR is generall stable over time II. The NRFR tends to be stable in the short-run, but not so in the long run III. If prices are expected to rise at 3.5% during one year investment period and market requires 4% RRFR for one year, then NRFR is 7.5% A I only B I and II only C I and III only D II and III only
i think it is D, just becuase NRFR tends to be stable in the short becuase of the anticipated inflation and NRFR equals RRFR + inflation. So my answer is D. I hope I am right
III can be eliminated. because the NRFR is 7.64. If III was about the approximate NRFR, then you can add RFR and inflation rate. the anser to me is B. I think the inflation is more volatile in the long-run. Guys please correct me.
C. RRFR is generally stable over time and the approximation of NRFR is acceptable in most Schweser Qbank questions, so I think the correct answer is C.
Correct ans was A. The Q is from Boston Society sample exam and it doesn’t come with explainations. For me all three appeared correct assuming approximation for III part. I hope not to see such questions in Exam !
Stupid question. 1) I like III. also and if the issue is compounding them, I have lots to say about that. 2) If we compare I) and II) we’re supposed to say that the short-term NRFR is less volatile than the long-term RRFR. I don’t know how to compare those except that once we add a term, I would compare say the 1-day vol of NRFR with the 1-yr vol of RRFR and I’ll bet that latter is greater than the former.
I agree with your second point, but we cant pick an answer based on an estimate (1)
It’s not an estimate - it’s the same number to the same sig figs as given in the problem.
WE all know that the expected inflation is stable in the short-run and unpredictable for the long-run. So II is true. The wording in the question is very important. If the question is doesn’t say about “estimates”, they mean compounding. We can rule out III So I have no clue why A is the answer 
Say what? II) says NRFR is stable in the short run. It’s what do they mean by stable? I lost 8.5% in 5 minutes on ED options once.