Question

Say you own an asset that had a total return last year of 11.65 percent. If the inflation rate last year was 2.75 percent, what was your real return? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

8.66%

Explanation:

The computation of the real rate of return is shown below:

Real rate of return = {( 1 + nominal rate of return) ÷ ( 1+ inflation rate)} - 1

= {( 1 + 11.65%) ÷ ( 1 + 2.75%)} - 1

= {(1.1165) ÷ (1.0275)} - 1

= 1.086 - 1

= 0.0866 or 8.66%

We simply apply the formula in which the numerator is nominal rate of return and denominator is inflation rate of return