Chapter 14 - Relationship Between Returns On Asset Classes

Question 1

Expected and required return

Answer 1

Required return = required risk free rate + expected inflation + risk premium

Expected return = initial income yield + expected capital growth
= initial income yield + income growth + impact of change in yield

If equal then fairly priced

Question 2

Equity

Answer 2

Close to growth in GDP

Question 3

Bonds

Answer 3

Fixed interest stocks no growth

Real return on index linked bonds know ln at outset

Question 4

Cash

Answer 4

Exceed inflation except if inflation is rising rapidly and underestimated by investors