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Suppose the real risk-free rate is 3.50% and the future rate of inflation is expected to be constant at 2.25%. What rate of return would you expect on a 1-year Treasury security, assuming the pure expectations theory is valid? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.

a. 5.25%

b. 5.50%

c. 5.75%

d. 6.00%

e. 6.25%

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Financial Management, Finance

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