The annual percentage of profit on an investment that has been prorated for inflation is known as the real rate of return. As a result, the real rate of return provides an accurate representation of the real purchasing power of a particular sum of money over time.
The investor can calculate how much of a nominal return is real return by adjusting the nominal return to account for inflation.
Real rate of return is one plus nominal rate of return.
(1 plus the inflation rate) (1 plus 0.45 = (1 plus 0.30)
(1 + rate of inflation)
The inflation rate is equal to [(1 + 0.45 / (1 + 0.30)]. 1 Inflation rate equals 0.1154 percent, or 11.54%
Real rate of return has the drawback that its value is unknown until after the event has taken place. That is to say, inflation is a trailing indicator for any particular period, meaning it can only be measured after the relevant period has ended.
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