Homework Answers
The real rate of return is computed as shown below:
= [ (1 + Nominal rate of return) / (1 + inflation rate) ] - 1
Nominal rate of return is computed as follows:
= (Value of stock today - stock's value one year ago) / stock's value one year ago
= ($ 11,000 - $ 10,000) / $ 10,000
= 10%
So, the real rate of return will be computed as follows:
= [ (1 + 0.10) / (1 + 0.027) ] - 1
= (1.10 / 1.027) - 1
= 7.1% Approximately
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