Suppose the real risk-free rate is 3.50% and the future rate of inflation is expected to be constant at 4.10%. What rate of return would you expect on a 1-year Treasury security, assuming the pure expectations theory is valid? Include cross-product terms, i.e., if averaging is required, use the geometric average. (Round your final answer to 2 decimal places.)
A. 6.58%
B. 7.74%
C. 9.37%
D. 6.50%
E. 7.90%
Answer: B
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