Question

Say you own an asset that had a total return last year of 12 percent. If the inflation rate last year was 5 percent, what was your real return?

Answer 1

Answer:

Real rate of return= 0.07 = 7%

Explanation:

Giving the following information:

Say you own an asset that had a total return last year of 12 percent. The inflation rate last year was 5 percent.

The effect of the inflation rate is counterproductive to the rate of return. It diminishes purchasing power.

Real rate of return= nominal interest rate - inflation rate

Real rate of return= 0.12 - 0.05

Real rate of return= 0.07 = 7%