I understand for the Singer Tarher calculation, you add the risk free rate and any relevant premiums to get to the expected return, but in this case (2014 CFAI AM) they are only adding the illiquidity premium and not the rf rate although the question is asking for the expected return. What am I missing here?
Secondly, for the below Taylor rule calculation, the question is not adding the expected inflation to the r neutral rate. In general, my understanding is, if the question specifies that the short term neutral rate is “real”, we add the expected inflation and if it’s nominal we don’t add it. But if they dont specify if it’s real or nominal do we just assume that it’s nominal?
For Taylor rule, the reading was revised so ignore that practice question.
On ST, the current reading mentions a potential illiquidity premium may need to be added to calc the Er or total RPs. They’re just seeing if you read the material.
Right adding the illiquidity premium makes complete sense. I am just not understanding why they aren’t adding the risk free rate to the risk premium to arrive to the expected return?
This is really strange! For ST, the Risk free rate must definitely be added
The expected return uses the risk free rate as the base and adds any premiums to that. I am assuming this would have been an error maybe? Cuz it makes no sense otherwise…
. They add the rf onto the risk premium right above the answer to the next Q.