Chapter 14 - Relasionship between asset classes

Question 1

State the formula for the required return on an asset

Answer 1

Required Return = risk free return + expected inflation + risk premium

Question 2

State the formula for the expected return on an asset

Answer 2

Expected return = initial income yield + expected capital growth

Total return = initial income yield + income growth + impact of change in yield

Question 3

What does it mean if the required return equals the expected return?

Answer 3

The assets are ‘fairly priced”