Suppose the current spot rate for the Norwegian kroner is $1 = NKr6.6869. The expected inflation rate in Norway is 6 percent and in the U. S. it is 3.1 percent. A risk-free asset in the U. S. is yielding 4 percent. What risk-free rate of return should you expect on a Norwegian security?

The risk-free rate of return expected on a Norwegian security is 6.9%

Explanation:

Here, we are expected to calculate the risk-free rate of return on a Norwegian security.

We use the mathematical formula as follows;

Risk-free home - Expected inflation home = Risk free foreign - Expected inflation foreign

Kindly note that home refers to the US while foreign refers to Norway

From the question, we identify the following terms;

Risk-free home = 4%

Expected inflation home = 3.1%

Risk-free foreign = ?

Expected inflation foreign = 6%

Now, plugging these values, we have;

4% - 3.1% = ? - 6%

0.9% = ?- 6%

6% + 0.9% = ?

? = 6.9%

Thus, the risk-free rate of return expected on a Norwegian security is 6.9%

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