Question

Assume that last year, Isaac earned 13.6 percent on his investments while U.S. Treasury bills yielded 2.7 percent, and the inflation rate was 2.2 percent. What real rate of return did he earn on his investments last year?
A) 10.39 percent
B) 11.63 percent
C) 12.24 percent
D) 13.56 percent
E) 11.15 percent

Answer 1

Answer:

E) 11.15 percent

Explanation:

Nominal rate of return = 13.6% or 0.136

Rate of inflation = 2.2% or 0.022

Use Fisher equation to calculate the real rate of return;

(1+Real) = (1+Nominal) / (1+ inflation)

Next, plug in the numbers to the Fisher equation;

(1+ Real ) =  (1.136)/ (1.022)

(1+ Real) = 1.1115

Subtract 1 from both sides;

Real = 1.1115 -1

Real = 0.1115

Therefore, Real rate of return = 0.1115*100 = 11.15%