Question

You are given the following long-run annual rates of return for alternative investment instruments: U.S. Government T-bills 3.10 % Large-cap common stock 11.25 Long-term corporate bonds 5.65 Long-term government bonds 4.65 Small-capitalization common stock 13.25 The annual rate of inflation during this period was 2 percent. Compute the real rate of return on these investment alternatives. Do not round intermediate calculations. Round your answers to two decimal places.

Answer 1

Answer:

The real rate of return is 0.10%

Explanation:

For computing the real rate of return, we need to apply the formula which is shown below:

( 1 + nominal rate) = ( 1 + real rate) × (1 + inflation rate)

So,

The real rate = {(1 + nominal rate) ÷  (1 + inflation rate)} - 1

                     = ((1 + 3.10%) ÷  (1 + 2%)} - 1

                     = (1.031 ÷ 1.02) - 1

                     = 1.0107 - 1

                     = 0.10

The Government T-bills is only the nominal rate so we considered this only