Question

1a.

painting:

(250,000 - 200,000) / 200,000

rate of return 25%

Bottle of burgundy:

(275-255)/255

rate of return: 7.84%

Suppose that a yearly inflation was 5%. Calculate real rates returns on the assets listed.

b. Can the real rate of return be lower than the nominal rate of return?

Answer 1

(a)

Real return = Nominal return - Inflation rate

Real return on Painting = 25% - 5% = 20%

Real return on Burgundy = 7.84% - 5% = 2.84%

(b)

If inflation rate is positive, the real return will be lower than nominal return.