Question

You made an investment over the past year, and your nominal return was 24.2%. Over the same year, the rate of inflation was 2.3%. What was the real rate of return for this investment?

Answer 1

The Real rate of return for the investment

The Real Rate of Return is calculated by using the following formula

Real Rate of Return = [(1 + Nominal Rate) / (1 + Inflation Rate)] – 1

Here, we’ve Nominal Rate = 24.2%

Inflation Rate = 2.3%

Therefore, The Real Rate of Return = [(1 + Nominal Rate) / (1 + Inflation Rate)] – 1

= [(1 + 0.242) / (1 + 0.023)] – 1

= [1.242 / 1.023] – 1

= 1.214076 – 1

= 0.214076 or

= 21.41%

“Hence, the Real rate of return for this investment will be 21.41%”