Consider these long-term investment data:

• The price of a 10-year $100 par value zero-coupon inflation-indexed bond is $84.49.

• A real-estate property is expected to yield 2% per quarter (nominal) with a SD of the

(effective) quarterly rate of 10%.

a. Compute the annual rate of return on the real (i.e., inflation-indexed) bond.

b. Compute the continuously compounded annual risk premium on the real-estate investment.

c. Use the formula in footnote 17 and Excel’s Solver or Goal Seek to find the standard deviation of the continuously compounded annual excess return on the real-estate investment.

d. What is the probability of loss or shortfall after 10 years?