Risk-free rate of return

Question

Problem:

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.

Requirement:

Question: What risk-free rate of return should you expect on a Norwegian security?

1. 4.5 percent
2. 4.0 percent
3. 6.9 percent
4. 5.0 percent
5. 3.5 percent

Note: Provide specific examples to support your answers.