Question

The Costaguanan stock market provided a rate of return of 96%. The inflation rate in Costaguana during the year was 80%. In the United States, in contrast, the stock market return was only 16%, but the inflation rate was only 2%. Calculate the real rate of return for both the Costaguana and the United States stock markets. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) Real rate of return Costaguana United States Which country's stock market provided the higher real rate of return? Costaguana O United States

Answer 1

Real rate of return =(1+Nominal Rate)/(1+Inflation)- 1

For Costaguana stock market:
Real rate of return =(1+96%)/(1+80%)- 1
=(1.96)/(1.80)- 1
=1.088888889- 1
=0.088888889 or 8.89% (Rounded to 2 decimal places)

Hence, the real rate for Costaguana is 8.89%

For US stock market:
Real rate of return =(1+16%)/(1+2%)- 1
=(1.16)/(1.02)- 1
=1.13725- 1
=0.13725 or 13.73% (Rounded to 2 decimal places)

Hence, the real rate for the United States is 13.73%

So, the United States stock market provided the higher real rate of return.