Answer:
11.4%
Explanation:
Here is the full question :
Assume that last year the risk free rate equaled 1.75% and the Market Risk Premium equaled 8.9%. This year the inflation rate has increased 0.7% over last year's expectations and the Market Risk Premium has stayed the same. What do you expect the return on the market to equal? 7.2% 10.7% 11,4% 6.5% 8.196
Market rate of return = nominal interest rate + market premium
Based on the Fisher's equation :
(1 + nominal rate) = (1 + inflation rate ) x (1 + real rate)
(1.007) x (1.0175) = 1.0246
Nominal rate = 2.46%
Market return = 2.46% + 8.9% = 11.36% = 11.4%
