Question

The Costaguanan stock market provided a rate of return of 97%. The inflation rate in Costaguana during the year was 82%. In Ruritania, in contrast, the stock market return was only 14%, but the inflation rate was only 3%.

a. Calculate the real rate of return for both the Costaguana and the Ruritania stock markets. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

Costaguana real rate of return=

Ruritania real rate of return=

Answer 1

Based on Fischer Relation

(1 + Nominal rate) = (1 + Real rate) * (1 + Inflation)

For Costaguanan Stock,

(1 + 97%) = (1 + Real rate) * (1 + 82%)

(1 + Real Rate) = 1.0824

Real Rate = 0.0824 = 8.24%

For Ruritania Stock,

(1 + 14%) = (1 + Real rate) * (1 + 3%)

(1 + Real Rate) = 1.1068

Real Rate = 0.1068 = 10.68%