Quantum’s committee forecasts weaker-than-expected GDP growth in the future and expects that GDP growth will be more volatile as the economy ultimately adjusts to a changing interest rate policy. Rutherford believes these factors will exert downward pressure on short-term Treasury Inflation-Protected Securities (TIPS) rates.
Is Rutherford most likely correct with regard to the impact on short-term TIPS rates?
- Yes.
- No, with regard to the impact of volatility.
- No, with regard to the impact of growth.
Answer is option B because the GDP growth rate in the one period to the next period cannot be prefectly anticipated. Under this uncertain circumstances the interest rate is positively related to GDP growth rate but additionally they will be positively related to the expected volatility of GDP growth.
answer is option B because impact of GDP volatility will impact the Required rate of return (Re) also .