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Risk-Free Rate= Norminal Rate Of Return - Risk Premiums
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The risk free rate of return is a rate an investor will expect with zero risk over a specified period of time. In order to calculate risk free rate you need to use CAPM model formula ra = rrf + Ba (rm-rrf), where rrf is risk free rate, Ba is beta of security and Rm is market return.
Rfrr= [(1+nominal rate)/(1+inflation rate)] - 1* 100
Risk free rate of return in Pakistan for 2012 is "12%". The risk free rate is declared by the State Bank of Pakistan after the specific period. The 3-month Govt. Treasury Bills' rate is taken as proxy for the risk free rate of return.
To calculate a forward FX rate, use the formula; Forward rate = Spot rate*(1 + r1)^n ------------- (1 + r2)^n where r1 is the relevent interest rate for currency 1, r2 is the relevent interest rate for currency 2, n is the period in question In terms of the interest rate to be used, it should be the risk free rate for the period in wuestion for each currency.
Expected return= risk free rate + Risk premium = 11 rate of return on stock= Riskfree rate + beta x( expected market return- risk free rate)
Risk-free interest is the rate of interest which exists when the expected risk of the economic transaction is zero. In most cases, the general interest rates in major banks of a country reflects the nominal interest rate, which is risk free. The real interest rate is simply the nominal interest rate minus the rate of inflation.
Risk premium.
Risk free rate of return or risk free return is calculated as the return on government securities of the same maturity.
The market risk premium is measured by the market return less risk-free rate. You can calculate the market risk premium as market risk premium is equal to the expected return of the market minus the risk-free rate.
12.5% 12.5%