asset. For an investor with a holding period of one year, for example, a one-year T-bill is a riskless investment, at least in terms of its nominal return, which is known with certainty. However, the standard deviation of the one-year T-bill rate estimated from historical data is not zero: This reflects variation over time in expected re- turns rather than fluctuations of actual returns around prior expectations. The risk of cash flows of real assets reflects both business risk (profit fluctuations due to business conditions) and financial risk (increased profit fluctuations due to leverage). This reminds us that an all-stock portfolio represents claims on leveraged corporations. Most corporations carry some debt, the service of which is a fixed cost. Greater fixed cost makes profits riskier; thus leverage increases equity risk.   CONCEPT C H E C K ☞ QUESTION 2 Compute the average excess return on stocks (over the T-bill rate) and its standard deviation for the years 1926-1934.     5.4 REAL VERSUS NOMINAL RISK   The distinction between the real and the nominal rate of return is crucial in making invest- ment choices when investors are interested in the future purchasing power of their wealth. Thus a U.S. Treasury bond that offers a "risk-free" nominal rate of return is not truly a risk- free investment-it does not guarantee the future purchasing power of its cash flow. An example might be a bond that pays $1,000 on a date 20 years from now but nothing in the interim. Although some people see such a zero-coupon bond as a convenient way for individuals to lock in attractive, risk-free, long-term interest rates (particularly in IRA or Keogh4 accounts), the evidence in Table 5.3 is rather discouraging about the value of $1,000 in 20 years in terms of todays purchasing power. Suppose the price of the bond is $103.67, giving a nominal rate of return of 12% per year (since 103.67 1.1220 1,000). We can compute the real annualized HPR for each inflation rate. A revealing comparison is at a 12% rate of inflation. At that rate, Table 5.3 shows that the purchasing power of the $1,000 to be received in 20 years would be $103.67, the amount initially paid for the bond. The real HPR in these circumstances is zero. When the rate of in- flation equals the nominal rate of interest, the price of goods increases just as fast as the money accumulated from the investment, and there is no growth in purchasing power. At an inflation rate of only 4% per year, however, the purchasing power of $1,000 will be $456.39 in terms of todays prices; that is, the investment of $103.67 grows to a real value of $456.39, for a real 20-year annualized HPR of 7.69% per year.     4 A tax shelter for self-employed individuals. I. Introduction 5. History of Interest Rates and Risk Premiums The McGraw−Hill