Risk premium of equities

CFA Level I Portfolio Management
#1

Hi guys,
Please help me with this question from CFA website.

An analyst observes the following historic geometric returns:

Asset Class Geometric Return (%)
Equities 8.0
Corporate Bonds 6.5
Treasury bills 2.5
Inflation 2.1

The risk premium for equities is closest to:

  1. A.5.4%.
  2. B.5.5%.
  3. C.5.6%.

In my idea, i will apply this equation:
(1+r)=(1+rrF)×(1+π)×(1+RP)

So my answer is about 3.2%

But their solution:

Solution

A is correct. (1 + 0.080)/(1 + 0.0250) − 1 = 5.4%

#2

Is the T-bill return nominal or real?

#3

I reckon it’s norminal

#4

In which case you needn’t include inflation in your equation; it’s already included in the T-bill return.

#5

I see. Thank you.

#6

My pleasure.

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